Appendix B: The Daily Grind

Twelve months ago, David opened a coffee shop, The Daily Grind, in Mercy

Hospital's former gift shop. David was confident that he had the knowledge to make a

success of this new business. He produced a quality product that people needed, had

priced the product to be very competitive, and had a great location in a high$-$traffic

area of the hospital.

Material Costs

The Daily Grind uses a specialty brand of Kona coffee beans costing $$8$ per pound.

Each pound of coffee beans produces $256$ ounces of coffee. Coffee is sold in three

sizes: a small cup holding $8$ ounces, a medium cup holding $12$ ounces, and a large

cup holding $16$ ounces.

The cups needed to serve the coffee cost $$\mathrm{.}05$ for the small cup, $$\mathrm{.}06$ for the medium

cup, and $$\mathrm{.}07$ for the large cup. Lids cost $$\mathrm{.}03$ per cup and are the same regardless of

cup size. Sleeves cost an additional $$\mathrm{.}04$ per cup. On average, sugar and cream cost

$$\mathrm{.}02$ per cup for small cups, $$\mathrm{.}03$ for medium cups, and $$\mathrm{.}04$ for large cups.

Labor Costs

The Daily Grind is open $12$ hours each day, $7$ days a week $(365$ days per year$),$ and

is staffed with three employees during the morning shift $(7$:$00-11$:$00),$ two employees

from $11$:$00$ until $3$:$00,$ and three employees from $3$:$00$ to $7$:$00.$ Labor is a fixed cost,

because the employees are paid regardless of whether coffee is sold. David worked

$60$ hours each week, on average, and was paid a salary of $$30,000$ during the first

year of operations. Fringe benefits for David, including health insurance and payroll

taxes, accounted for an additional $$10,000$ of costs for the company. Part$-$time

employees work an average of $24$ hours each week and are paid $$9$ per hour. Payroll

taxes and other costs average about $$1\mathrm{.}00$ per hour for part$-$time employees. As

shown in the following table, part$-$time employees worked from $656$ hours to $727$

hours each month:

Month Part$-$time Employee Labor Hours

January $722$ hours

February $656$ hours

March $727$ hours

April $705$ hours

May $727$ hours

June $705$ hours

July $727$ hours

August $727$ hours

September $705$ hours

October $727$ hours

November $705$ hours

December $727$ hours

Overhead Costs

During the first year of operations, the hospital charged rent of $$2,000$ per month. As

part of the rental cost, the hospital provided furniture and fixtures for the shop, as well

as nightly cleaning services. David leased a drip coffeemaker, refrigerator, coffee

grinder, scale, and cash register for $$150$ per month, total. David paid directly for his

utilities $($electricity and water$).$ The costs of electricity include the costs of heating and

cooling the shop. as well as the cost of running the electric appliances $($refrigerator$,$

coffeemaker, etc.$)$

For the first $12$ months of operations, utility expenses were as follows:

Appendix B: The Daily Grind$1$

Selling and Administrative Costs

David incurred $$200$ a month in accounting fees and spent $$500$ on various

promotional and advertising materials during the year. He also paid $$1,000$ for liability

insurance.

Sales Revenue

During the first year of operations, David set the shop's prices to be slightly lower than

their competitors'. The Daily Grind sells a small cup of coffee for $$1\mathrm{.}25,$ a medium cup

for $$1\mathrm{.}65,$ and a large cup for $$1\mathrm{.}95.$ Sales revenue was as follows:

Month Sales in Cups of Coffee

$*$Coffee sales average $10\%$ small cups $(8$ ounces$),50\%$ medium cups $(12$ ounces$),$

and $40\%$ large cups $(16$ ounces$).$

January $9,300$ cups$*$

February $9,800$

March $10,850$

April $9,500$

May $9,300$

June $9,000$

July $8,800$

August $8,600$

September $11,000$

October $11,620$

November $12,000$

December $12,400$

Requirements

$1.$ Prepare an income statement for The Daily Grind for the last year. You can

assume that there are no inventories on hand at the end of the year. $($All coffee and

supplies purchased during the year are consumed.$)$

$2.$ Determine whether the costs incurred by The Daily Grind are fixed, variable $($with

respect to number of cups of coffee sold$),$ or mixed.

$3.$Use regression analysis and the high$/$low method to calculate the monthly fixed

cost and the variable component of the utility expenses incurred by The Daily Grind.

Use cups of coffee sold as the independent variable and utility expense as the

dependent variable in your regression analysis. After calculating both numbers, round

your final answers to two decimal places.

$4.$ Compare the regression results with the high$/$low results. Which model would you

suggest?