3page write-up case analysis. See the attached file.

BAKE ME A CAKE, IVEY W13020 Format 3 pages MAX including all narrative, tables, charts, graphs , etc...BEAUTIFUL LOOK (maximum length does not include cover page, no citation page needed) Executive summary style EXAMPLE LIKE the Morgan Stanley analyst report, Visually TO BE 100% CLEAR, see tables, charts, or graphs interspersed in the 3 pages of your report Potential Questions (answer whichever you think are most important, I recommend focusing on the highlighted questions) 1. What are Bake Me A Cake's strength's and weaknesses? 2. Perform an industry analysis. Identify threats and opportunities. 3. Analyze the company's statement of cash flows for the year ended Dec 31,2011. 4. Analyze the relevant financial ratios for Bake Me A Cake. 5. Outline the pros and cons of renovating the family home versus leasing a location. Complete a financial analysis comparing the two options. 6. What are the advantages and disadvantages of increasing cupcake prices? What should she price the cupcakes at and why? Discuss costs of cupcakes in relation to price. 7. Prepare a breakeven analysis for the location you think is most attractive using the price/cost you calculated for cupcakes. BAKE ME A CAKE It was mid-January 2012, and Amy Bourgon, sole proprietor of Bake Me A Cake (BMAC) in Sarnia, Ontario, had just finished her final cake order of the week. Business had slowed following the holiday season, and Bourgon finally had time to review the performance of BMAC's third fiscal year, ended December 31, 2011. She wanted to improve the company's profitability because she had not yet met her target net earnings for the business. Furthermore, Bourgon currently operated the business out of her home, and she was unsure of how much more growth the current space could accommodate. She wondered whether it was time to take the business to the next level, which meant giving BMAC its own physical space and improving margins. Bourgon needed to complete an assessment of the industry and BMAC's performance to date, and then make financial projections based on her new plan. She hoped to implement any needed changes immediately and to have a new physical space in a few months so that she would be ready for a busy wedding season. BAKE ME A CAKE Amy Bourgon Amy Bourgon had always had a passion for baking and a unique artistic ability. She had been employed in the food services industry for several years, most recently in the kitchen at the Point Edward Charity Casino. In 2008, Bourgon took a maternity leave after giving birth to her first child. Following a year at home with her son, she decided not to return to the casino but to instead start a home business. Bourgon valued raising her children in her own home and spending time with her family above her current career. A home business would give her the opportunity to pursue her interest in designing cakes while spending time with her young family. In 2009, BMAC was founded as a sole proprietorship in Sarnia, Ontario, to serve Sarnia and the surrounding area. Page 2 9B13B001 Sarnia, Ontario Sarnia, located in Southwestern Ontario, was a three-hour drive west of Toronto, and a one-hour drive east of Detroit, Michigan. Sarnia had a population of 71,419. The median age of Sarnia residents was 43.2 years, and the median household income was 1 $69,731. The province of Ontario had a slightly lower median age at 39.0 years and a 2 median household income of $69,156. The First Three Years In the first two years of operation, Bourgon had focused solely on custom cake orders. She began supplying friends and family with cakes that could be sculpted into a variety of unique designs. See Exhibit 1 for samples of BMAC's cake designs. Soon, Bourgon was creating cakes for all occasions, including birthdays, baby showers and retirement parties. Bourgon's unique cake designs excited her customers and created plenty of word-of-mouth advertising, which had resulted in rapid expansion of her customer base. She believed BMAC offered the best design and variety of cakes in Sarnia. BMAC's cake prices (exclusive of wedding cakes) varied depending on the custom order. Bourgon needed to know the design before she quoted a price for her cakes. In general, 3 a flat art cake was priced at $40, while layered cakes with sculpted designs ranged in price from $60 to $120. By her third fiscal year, Bourgon was working full-time to meet the demand for customorder cakes and gourmet cupcakes. Wedding cakes had become a significant aspect of the business -- she received wedding cake orders for almost every weekend of the summer (June to August). Wedding cake prices varied greatly based on size and design, but the average price of BMAC's wedding cakes was $400. Operating out of her own kitchen, Bourgon received orders by telephone or email, baked the cakes and then arranged for either pick-up at her home or delivery. BMAC's hours were 11 a.m. to 4 p.m., Tuesday through Saturday. In fiscal 2011, Bourgon hired an additional baker to help complete orders. She also employed her mother, a chartered accountant, on a parttime basis to assist with the bookkeeping. Bourgon was not entirely pleased with BMAC's financial performance since its inception. BMAC's sales had increased each year; however, in her view, she had not yet earned a sufficient net profit to sustain herself on a full-time basis. See Exhibit 2 and Exhibit 3 for the company's statement of earnings and balance sheet. A statement of cash flows and select financial ratios for BMAC are provided in Exhibit 4 and Exhibit 5. INDUSTRY OVERVIEW Bourgon had been looking at risks and opportunities in the bakery industry and wanted to ensure she understood the market before investing more of her savings into the business. No Canadian data were available, but Bourgon had found some interesting facts about the industry in the United States. She believed that the Canadian market, although considerably smaller, behaved very similarly to the United States market. 1 All currency amounts shown are in Canadian dollars unless otherwise noted. 2 Statistics Canada, \"2006 Community Profiles,\" http://www12.statcan.ca/census- recensement/2006/dp-pd/prof/92- 591/index.cfm?Lang=E, accessed October 3, 2011. 3 A flat art cake was typically rectangular in shape, approximately 25 45 cm (10\" 18\") and could feed an average of 20 people. Page 3 9B13B001 The bakery industry in the United States represented more than US$33 billion in annual revenues. Sales comprised baked breads, buns and bagels, cakes and pies, pastries and sweet goods (see Exhibit 6). The bakery industry was divided into two segments: commercial bakeries and retail bakeries. The U.S. commercial bakery segment represented approximately 2,800 companies and 4 US$30 billion in annual revenues. Commercial bakeries included large corporations that supplied grocery stores and other retailers with packaged baked goods and snacks, most of which had an extended shelf life. Retail bakeries in the United States represented approximately 6,000 different businesses and US$3 billion in total annual revenues. The retail bakery industry was comprised of stores that produced and sold bakery products onsite. The typical retail business operated only one location. See Exhibit 7 for financial information and ratios on small companies in the U.S. bakery industry. Whereas the U.S. commercial segment was quite concentrated, the U.S. retail bakery segment was highly fragmented. The top 50 commercial bakeries represented 75 per cent of total revenues, whereas the top 50 retail bakeries represented only 15 per cent 5 of total revenues. The two segments differed considerably on labour and equipment costs. U.S. retail bakeries were very labour-intensive, generating approximately US$55,000 in annual revenue per employee; whereas, commercial bakeries were 6 capital-intensive and generated about US$230,000 in annual revenue per employee. The rising price of wheat, a key ingredient for many bakers, created higher raw materials costs for many companies in the industry. In early 2011, wheat prices in North America continued to increase; in fact, February 2011 wheat prices were nearly 80 per cent more than the same month of the previous year. As such, several large manufacturers had increased their selling prices to offset these higher costs. Retail bakeries reacted more slowly, but many had now adjusted their prices accordingly. These increases contributed to a 2.9 per cent increase in the March 2011 consumer 7 price index for food over the same month of the previous year. Overall, growth was forecast for the bakery industry with analysts expecting sales to increase four per cent 8 annually through 2015. COMPETITION Sarnia had seven independent bakeries and several grocery stores that operated their own in-house bakery. Loblaw, Metro and Wal-Mart offered freshly baked cakes. These grocers allowed some customization to their special-order cakes. Customers could select an image or design from a catalogue, and the bakery would create a flat art cake or add plastic decorations to enhance the appearance of the cake; however, the majority of cake sales from grocery stores came from pre-made cakes kept in the store's bakery and available for immediate sale. Grocers also allowed customers to have a message written on the cake at the time of the sale. Of the seven independent bakers, five sold cakes. See Exhibit 8 for an overview of product offerings from these seven bakeries. The majority of these cakes were flat art cakes, with some design elements. The 9 design was often limited to drawings with icing, edible images and handwriting on the cakes. These five bakers had cakes available for immediate purchase; however, companies such as William's Pastry Shop and Global Donuts & Deli had very limited quantities. Sticky Fingers prided itself on guaranteeing that cakes would be available when customers came into the store, but the store offered no custom designs. All of the competitors priced flat art cakes similarly to BMAC. Global Donuts and Sticky Fingers offered slightly lower prices than BMAC. Junior Baker's specialty was providing gluten-free baked goods. As well, Junior Baker was the only store that offered unique cake designs comparable to those available through BMAC. Customers were able to order cakes in a variety of shapes, and Junior Baker would attempt to produce sculpted cakes. These sculpted cakes were not as visually appealing as BMAC's cakes, and Junior Baker had only created a fraction of the number of designs that BMAC had made. Junior Baker had higher prices than most of the competitors; however, Junior Baker's sculpted cakes (not gluten-free) usually cost less than $100. EXPANSION As a result of consistent sales growth, Bourgon was considering moving the business out of her family's kitchen. She anticipated fiscal 2012 sales to increase 15 per cent, regardless of her moving decision. Food costs would remain the same per cent of sales as fiscal 2011. The alternatives she wanted to evaluate were renovating her family home to create a separate space for the business or moving BMAC to a commercial location. Bourgon was unsure whether it would be better to invest more of her money in the business or in market investments. The Canadian market had experienced many ups and downs in 2011, and Bourgon believed a relatively safe investment would earn about a four per cent return. Renovating the Family Home Bourgon could renovate her family home to create a separate kitchen for the business with a separate entrance for customers. The home's property had sufficient space for such a renovation. If this option was chosen, the first requirement would be obtaining a $500 building permit from the City, which included the inspections before and after construction. Bourgon had contacted a reputable contractor in the area and had obtained a 10 construction cost estimate of $26,000. This amount included the addition to the side of the house and new plumbing, electrical and gas hook-ups. New appliances for the kitchen, including an oven, refrigerator, freezer and dishwasher, would cost BMAC an 11 additional $5,200. Bourgon also anticipated spending $1,750 on furnishings and 12 decor for the new space and $1,500 on new signage. If Bourgon made the decision to renovate in the next two weeks, construction could begin in March and be completed by the end of April. This schedule would allow the new location to be open for business on May 1, 2012. This renovation would likely lead to a $700 increase in sales per month, due to a more professional appearance and increased signage. 9 Edible images were pictures that could be printed with edible food colourings and placed on cakes. Customers could provide their own photos, which could be used to create the edible image to decorate a cake.10 The new space would be amortized using the straightline method over a 20-year useful life, with no expected salvage value. 11 New appliances would be amortized using the straight-line method over a 10-year useful life, with no expected salvage value.12 Both these assets would be amortized using the straight-line method with an estimated useful life of five years and no expected salvage value. Page 5 9B13B001 Bourgon believed she would need to pay her current employee for an additional 10 hours a month to help with the increased orders and cleaning. The employee was paid $10.75 an hour. Following the renovation, Bourgon expected the total annual utilities would increase to $6,850 for the renovated space. She also planned to increase BMAC's 13 annual advertising expenses by $450. Bourgon did not expect her insurance costs to increase since she was already paying a commercial rate on her house insurance to cover the business. BMAC would need to finance the renovations with a bank loan. The bank would finance only 75 per cent of the construction cost, and the loan would be repaid in equal monthly installments over five years. Interest would be charged at a rate of 6.75 per cent on the 14 outstanding balance of the bank loan at the beginning of each month. Bourgon's personal savings were sufficient to cover additional investments up to $20,000. Leasing a Location Bourgon also wanted to look at the option of moving BMAC to a leased commercial space. After searching for a suitable space, she had decided on one property -- a former restaurant in downtown Sarnia that had been closed and then renovated to create an apartment in the former dining room area. Bourgon was interested in the space that included the former restaurant's kitchen and a small 160-square-foot storefront with its own entrance. The space was beside a variety store, across the street from Bayside 15 Centre, and within a block of Sarnia's downtown shops. Rent would be $750 a month, including utilities, and the owner required first and last months' rent upon signing a one-year lease. This location offered much more exposure to passersby, and Bourgon expected walk-in traffic would become a new segment of her business. To serve walk-in customers, she planned to have cupcakes available for sale each day. As such, sales at the leased location would increase; Bourgon estimated monthly incremental revenue to be twice as high as the sales projected for the renovation alternative. Offering ready-made cupcakes created an element of risk because, to ensure the highest quality and freshness, Bourgon would sell the cupcakes only on the day they were baked but she would have no guarantee that all would be sold each day. As such, she projected the waste and spoilage expense to increase to $1,325 annually. With walk-in traffic and on-the-spot sales, Bourgon would need her employee to work more often since it would be inefficient to interrupt baking each time a customer entered the store. The employee would need to work each day the store was open, which would add 20 hours of wages each month. If she decided to lease the commercial space, Bourgon would also increase BMAC's advertising budget by $800 a year to attract new business and inform current customers of her new location. The only other cost expected to increase would be insurance. Bourgon's insurance company quoted BMAC an annual property insurance premium of $2,780. Bourgon would need a moving company to relocate some of her equipment and display cases to the new location at a projected cost of $800. In addition, Bourgon would need to purchase the same appliances for this kitchen as she would have purchased if she had renovated her home. Given the small size of 13 Advertising was the only expense BMAC paid for on account.14 Interest costs on this bank loan would amount to $1,106 in fiscal 2012.15 Bayside Centre was a 260,000square-foot shopping mall. The mall housed about 12 retail stores, a food court, medical offices and government services. The mall's traffic had consistently declined since a shopping centre had been developed in another area of the city. Page 6 9B13B001 commercial storefront, she would spend only 75 per cent of the furnishing and dcor budget she had projected for the home renovation; however, she believed a new larger sign, at a cost of $5,000, would be required to establish BMAC's presence in the higher- traffic commercial area. This commercial space was available for lease immediately, but Bourgon thought that, prior to opening BMAC, it would need some cosmetic changes -- painting, replacing the floor and adding window treatments. These leasehold improvements would cost 16 $1,800 and could be completed within a two-week period so that BMAC could move to the leased location by the end of February 2012. A bank would not be willing to offer BMAC a loan since the property could not be secured as collateral so Bourgon planned to use personal savings to finance any investment required to lease a location. IMPROVING PROFITABILITY Bourgon also wanted to improve BMAC's profitability. In analysing her pricing strategy, she felt the cakes were priced appropriately since they were dependent on the custom designs. However, she wanted to investigate the possibility of increasing the prices of her cupcakes because they took considerably more time to decorate. Also, she needed to revisit her promotional plan to see whether she could attract more customers to the business. Pricing Independent of the location decision, Bourgon believed that she could potentially increase the price of BMAC's cupcakes, currently priced at $2 each. Before deciding on an increase to $2.25 or $2.50 per cupcake, she wanted to determine the direct costs of making one cupcake and then evaluate the effect of raising the cupcake selling price. Bourgon baked cakes and cupcakes in batches. Creating batches of cake was a very labour-intensive process. Other than the bake time, everything from measuring and mixing to decorating and packaging was done by Bourgon or her employee. Her employee could mix, bake and decorate two batches of cake in one hour. One batch of cake produced 24 cupcakes or one regular-sized cake. When making a batch, the typical ingredients included flour, sugar, icing sugar, shortening, egg whites, vanilla extract, butter extract and eggs. See Exhibit 9 for a cost breakdown of these raw materials. In addition to the food ingredients, Bourgon also used cupcake papers and pastry bags. Each cupcake required one cupcake paper, which was used to line the baking tray. Bourgon ordered these cupcake papers in bulk at a price of $5 for 500 papers. The pastry bags held and dispensed icing to decorate the tops of the cupcakes. Pastry bags cost $31 for 100 bags and Bourgon used one bag for each flavour of icing. She estimated that 100 bags could be used to complete 50 batches of cake, although the pastry bag could continue being used if more batches were needed in the same day. When considering a price increase, Bourgon knew that sales volume could be affected. At the current price of $2 per cupcake, BMAC sold an average of 180 cupcakes each week for the 50 weeks of the year that BMAC operated. If Bourgon increased the price to $2.25 per cupcake, she expected the quantity sold would decrease by 10 per cent. If she raised the price to $2.50 per cupcake, she believed the quantity sold would decrease by 25 per cent. 16 Leasehold improvements would be amortized using the straight-line method over a five-year useful life, with no expected salvage value. Page 7 9B13B001 None of the competitors in Sarnia offered gourmet cupcakes comparable to those at BMAC. Bourgon wondered how a pricing change would affect her business and how customers would react. If she chose to increase the price, how should she go about implementing this change? If she didn't increase prices, could she use other ways to improve profitability? Advertising Bourgon wanted to revisit her advertising strategy. In fiscal 2011, BMAC's promotional spending had included 20 weeks of radio spots ($1,100), a quarter-page advertisement 17 in Bluewater Morning for the year ($480) and an advertisement on placemats at a local restaurant for the year ($400). In fiscal 2012, Bourgon planned to spend $2,000 on advertising in addition to any amount she would spend if she renovated her home or moved to a retail location. With a limited advertising budget, Bourgon wanted wide exposure and advertising that left a memorable impression for potential customers. She knew that part of taking BMAC to the next level included the need to create a brand image for the company in the Sarnia area. Bourgon credited Facebook with being BMAC's most effective advertising method. At no cost to the company, Bourgon had created a Facebook page for the business, which had attracted more than 1,400 members. Bourgon used the page to post pictures of her unique cake designs, provide general business information and inform customers of feature flavours and specials. With this success, she wondered whether paid Facebook advertising would be a worthwhile promotional tool. Facebook offered advertising that catered to each business's budget. Businesses could choose a budget based on cost per click (CPC) or cost per mille (CPM). Under CPC billing, Facebook charged businesses only when a user actually clicked on their advertisement. Facebook's average CPC rate was $0.35. Under CPM billing, Facebook charged businesses for every 1,000 impressions or page views, regardless of whether the user clicked on the advertisement. Facebook's average CPM rate was $0.19. Some other advertising methods Bourgon was considering included direct-mail flyers, a 18 Yellow Pages listing, an advertisement in the Sarnia Observer and bus shelter advertisements. Direct-mail flyers would cost $650 for 600 copies, including postage fees. A Yellow Pages listing would cost an annual fee of $285. The Sarnia Observer charged $175 for a one-time 7.5 10 cm (3 in. 4 in.) advertisement. The Sarnia Observer had a daily readership of nearly 30,000 people, of which 46 per cent were 19 between ages 25 and 54 and had a household income above $75,000. The City of Sarnia sold advertising space on bus shelters at a rate of $380 per month. An effective promotional plan would be critical to helping BMAC increase sales and would ideally lead to improved profitability. Before committing to any advertising contracts, Bourgon wanted to establish the market to target, the message to be communicated and which promotional methods to use. Should she consider other advertising methods that would be suitable for her business and budget? 17 Bluewater Morning was a Sarnia-based morning newspaper distributed in more than 100 local restaurants and approximately 50 other locations, such as doctors' offices, shopping malls and bingo halls. It was free to pick up at any of these locations. 18 The Sarnia Observer was a daily newspaper, which offered home delivery throughout Lambton County and cost readers $1 per issue. 19 Sarnia Observer statistics and demographics, January 2012, www.qmisales.ca/assets/files/Sarnia%20Observer.pdf, accessed January 20, 2013. Page 8 9B13B001 CONCLUSION Bourgon knew the upcoming year would be challenging. She had worked very hard to establish BMAC, and she had expanded the customer base over the past three years. Now, she needed to focus not only on expansion or a new location but also on how to improve the company's profitability to provide her with a full-time income. A thorough analysis of the business environment and her company's past performance would help her make the right decisions for BMAC's future. Bourgon planned to project financial statements for fiscal 2012 to gauge the potential impact of her decisions. She was unsure about moving the business out of her home's kitchen and taking on additional risks, but Bourgon was excited about growing the business and BMAC's future.