Accounting for Decision making Project: Case study Fall 2021 Part 3. Strategic Planning Assume that the owners have decided to invest in the new labeling machine and not pursue the national fast food chain offer. However, since then, the owners have been conducting strategic planning discussions on the future of Sweet Beginnings and are considering two major acquisitions. Option 1: Cravings Up to now, the business has focused on selling cakes as a wholesaler to grocery store chains. Now the owners have been approached by the management of a fast food restaurant chain. This chain, called Cravings, has five branches in the close vicinity of where Sweet beginnings operate. They have offered Anya and Jose to buy these branches, which have been showing losses. They would be allowed to run them under their own logo of Sweet Beginnings. Currently, Cravings is famous for its savory steaks and pies, but has been unable to expand its menu and compete with the new and varied dining options available to consumers in the region. The significant plan with this acquisition is that adding Sweet Beginnings outstanding dessert offerings would make the new restaurant an appealing destination for both dinner and dessert. To help prepare for the upcoming initial negotiations, Linda and Taylor have asked you to review the 2019 performance report of the Cravings chain (see below). It is estimated that the average price per meal would increase 12% with the new desserts and require an investment of $10 million 2019 Actual Customer Volume 1,066,000 Net Sales $10,523,440 Cost of Sales: Food $6,340,206 Total Labor $995.160 Cost of Sales $7.335,366 Gross Profit $3,188,074 Other Operating Expenses: $2.270,665 Operating Profit $917,409 Other Data Average Operating Assets $7,500,000 Food Costs: % variable 100% Total Labor Costs: % variable 70% Other Op. Expenses: % variable 6096 2018 Actual 1.105,000 $10,508,520 $6,362.772 $1,000,480 $7.363,252 $3,145,268 $2,222,835 $922,433 $7,500,000 100% 70% 60% Option 2: Factory premises The other strategic decision relates to doubling existing scale of operations. If the owners purchase and operate an existing food production facility, it would double Sweet Beginnings' current production volume. The factory is in a location that is well positioned on distribution routes and provides proximity to a whole new market of restaurants and grocery chains. The asking price for the factory is $7.5 million and includes existing equipment, from which about half could be used by Sweet beginnings. Additional investment would be required, of $2.5 million in equipment with a 10- year average life to provide the same capacity as the current factory. It would take about six months to get the new plant up and running. Estimated sales for the first three years after it opens are $4 million, $6 million and $10 million, respectively. Variable expenses are expected to have about the same behavior and relationship to sales as the current facility. Fixed expenses would be about the same amount per month as the current factory. Page 7 of 8 Accounting for Decision making Project: Case study Fall 2021 Required for Part 3: From the above details, make a recommendation to Sweet Beginnings, about the course of action they should take. You may use the following as a guide when making your recommendations: 1. Assess performance for Cravings In terms of expected return on investment (ROI) and residual Income. What were the major factors that contributed to the difference between profits from 2018 to 2019? What does this analysis suggest for Sweet Beginnings? II. Assess the feasibility for the new factory Including its expected ROI and residual Income. What does this analysis suggest for Sweet Beginnings? counung for Decision making Project Case study Required for Part 3: From the above details, make a recommendation to Sweet Beginnings, about the course of action they should take. You may use the following as a guide when making your recommendations: I. Assess performance for Cravings in terms of expected return on investment (ROI) and residual income. What were the major factors that contributed to the difference between profits from 2018 to 2019? What does this analysis suggest for Sweet Beginnings? II. Assess the feasibility for the new factory including its expected ROI and residual income. What does this analysis suggest for Sweet Beginnings? III. Comment on the non-financial factors that are relevant to this decision. What does this analysis suggest for Sweet Beginnings? iv. What action do you recommend for Sweet Beginnings at this time? [20]