Aussie Pies (A) "Wow, Australians really love their meat pies," Anna Amphlett said to Andrew Ferris as they sat at the Melbourne Cricket Ground watching the Australian Football League (AFL) Grand Final between the Sydney Swans and the West Coast Eagles. "I've seen people eat three meat pies straight, then wash them down with a full liter of Fosters Lager," she said as she looked across to see Sydney win the 2005 Premiership with a score of 58-54. According to observers, "Sydney has ended the longest premiership drought in AFL history in the most emotional and heart-stopping fashion imaginable by beating the West Coast Eagles by four points in the most exciting and closest grand final for ncarly 40 years." "But it's not just at footy matches," Ferris noted, "they eat them all the time, just like we eat hamburgers and hotdogs back in the States." Ferris thought about the number of pies caten by the 100,000 people attending the AFL Grand Final. Amphlett and Ferris lived in Seattle, Washington, but were on a vaca- tion to Australia to visit the Great Barrier Reef and attend the Grand Final in Melbourne. I wonder if Americans might develop a following for the Aussie meat pie," he said to Anna... "perhaps there's a business opportunity back home." Australian Meat Pies The meat pic, a hand-sized pot pie made with pastry and filled with minced (ground) beef and gravy, is consumed as a takeaway food snack in Australia (see Exhibit 1 for an illustration of a meat pie). Accord- ing to some observers, it is iconic in Australian culture and has been described by former New South Wales Premier Bob Carr as Australia's "national dish." The average Australian will consume an average of 45 mcat pics per year, and the popular brand Four'N Twenty Pic produces 50,000 pics per hour. The meat pie is heavily associated with Australian Rules football, rugby league, and other sports as one of the most popular consumables while watching a game. The meat pic is about four inches in diameter and traditionally caten in the hands with tomato sauce (aka tomato ketchup) and is usually accompanied by a cold beer. The pie has a short crust bottom and flaky pastry top (see Exhibit 2 for a meat pie recipe). Business Opportunity On returning to Seattle, Amphlett and Ferris continued working at their corporate jobs, but during their off-hours they would meet for beers at the Roanoke Tavern where they talked about launching the new meat pie business. They even registered the trade name, Aussie Pie, in case they later decided to introduce the concept of the Australian meat pie to American consumers. Amphlett was a regional manager of Starbucks, while Ferris was an assistant controller for Tully's Coffee Corporation. Amphlett started at Starbucks five years earlier after completing a history degree at AFL Web site: afl.com.au. From Wikipedia ibid. http://swengelsk.com/COOKING/AustralianFood.htm. Copyright 2006 Thunderbird, The Garvin School of International Management. All rights reserved. This case was prepared by Professor Graeme Rankine for the purpose of classroom discussion only , and not to indicate either effective or ineffective management C the University of Washington. Her job provided excellent experience in a broad range of activities including personnel, supply chain, production, and business development. After graduating from the University of Washington with an accounting and finance degree, Ferris began a two-year stint at PricewaterhouseCoopers (PWC) in the audit group. PWC's Seattle office had a large retail practice, so Ferris developed considerable retail experience by working on several large retail clients, including Nordstrom and REI. After two years at PWC, Ferris moved to the controller's office in the Seattle headquarters of Tully's Coffee Corporation. Establishing the Business Amphlett and Ferris used the kitchen in their home to develop more than 100 variations of the meat pie recipe, which they tested on friends and family. Finally, they hit upon a recipe which maintained the flavor of the authentic meat pie but contained less fat and sodium. Based on commercial prices, they estimated that the ingredients for the pie pastry and the filling such as ground beef, onions, flour, butter, and sauces, etc., would cost $1.20 per pie. Based on the production research in their home kitchen, they estimated that the amount of utilities consumed in making the pies would cost about $0.03 per pie. After conducting extensive surveys of passing customer traffic at Pike Place Market, they agreed that a reasonable initial sales price was $3.25 per pie, comparable to other fast foods such as burgers and hotdogs, which competed for customers' fast food dollars. Based on quotes from an industrial supplier, they estimated that it would cost $0.02 per pie for each pie box used for customer packaging at the point of sale. The entrepreneurial team felt that the ideal location in Seattle was a destination frequented by tourists who would be more likely to try new exotic foods. Market research suggested that Seattle's Pike Place Market on the Seattle waterfront close to Puget Sound ferries had excellent tourist traffic, particu- larly among the younger visitors. Discussions with commercial property managers prominent in Pike Place Market revealed that a large store of 4,000 square feet and the capacity to produce and sell 30,000 pics per month could be rented for $11,900 per month. Renting cooking equipment and fixtures would cost $8,000 per month and $5,000 per month, respectively. Amphlett and Ferris came up with a design for each store in which the meat pics would be made at the back of the store with a glass wall panel separating the front section so that customers could see the spotlessly clean facilities in which the pies were made. They felt that this would enhance the custom- crs' perception that Aussic Pies was a premium product using high quality ingredients and produced under impeccably sanitary conditions. Making meat pies at the store would require two full-time chefs at $1,800 per month. Only one full-time sales assistant would be needed at a monthly salary of $1,200 per month. Utility costs for lighting the store during business hours were estimated to be $300 per month. Business Decisions The business data Amphlett and Ferris had gathered was quite unsettling as they began to realize that it alone would not provide the answers they needed. They would soon have to make some important decisions that would have far-reaching consequences for the success of their business. 5. Assume that after the successful business operation in the first year the owners decided to change their location in the next year. After some careful investigation of various options the owners decided to set up their selling store in Alki Beach, Seattle. For this new selling store, they now have to pay a rental of $1000 per month. Their previous store will now be fully used for the production of meat pies from where they will deliver the pies to the final selling destination, the Alki beach. For the customers sitting arrangement on the beach, the owners decided to purchase some tables and benches; $120 per table & bench set X 10 = $12,000. The table and bench sets are expected to last next 5 years. From next year the two owners also decided to take fixed salary of $1000 each. Also the owners decided to give the sales personnel $.50 commission per pie sold, besides giving them fixed salary. Furthermore, in order to keep the pie production space meticulously clean the owners now want to spend $200 for supplies per month. The other costs given in the case (from first year of operation) will remain the same. a) Calculate the monthly fixed manufacturing overhead cost for the production of meat pies. [1] b) Calculate the monthly fixed selling and administrative cost. [1] c) Calculate the variable per unit cost of production of meat pies. [1] d) Calculate the per unit selling and administrative cost. [1] e) Calculate the new breakeven point in units. [1] Aussie Pies (A) "Wow, Australians really love their meat pies," Anna Amphlett said to Andrew Ferris as they sat at the Melbourne Cricket Ground watching the Australian Football League (AFL) Grand Final between the Sydney Swans and the West Coast Eagles. "I've seen people eat three meat pies straight, then wash them down with a full liter of Fosters Lager," she said as she looked across to see Sydney win the 2005 Premiership with a score of 58-54. According to observers, "Sydney has ended the longest premiership drought in AFL history in the most emotional and heart-stopping fashion imaginable by beating the West Coast Eagles by four points in the most exciting and closest grand final for ncarly 40 years." "But it's not just at footy matches," Ferris noted, "they eat them all the time, just like we eat hamburgers and hotdogs back in the States." Ferris thought about the number of pies caten by the 100,000 people attending the AFL Grand Final. Amphlett and Ferris lived in Seattle, Washington, but were on a vaca- tion to Australia to visit the Great Barrier Reef and attend the Grand Final in Melbourne. I wonder if Americans might develop a following for the Aussie meat pie," he said to Anna... "perhaps there's a business opportunity back home." Australian Meat Pies The meat pic, a hand-sized pot pie made with pastry and filled with minced (ground) beef and gravy, is consumed as a takeaway food snack in Australia (see Exhibit 1 for an illustration of a meat pie). Accord- ing to some observers, it is iconic in Australian culture and has been described by former New South Wales Premier Bob Carr as Australia's "national dish." The average Australian will consume an average of 45 mcat pics per year, and the popular brand Four'N Twenty Pic produces 50,000 pics per hour. The meat pie is heavily associated with Australian Rules football, rugby league, and other sports as one of the most popular consumables while watching a game. The meat pic is about four inches in diameter and traditionally caten in the hands with tomato sauce (aka tomato ketchup) and is usually accompanied by a cold beer. The pie has a short crust bottom and flaky pastry top (see Exhibit 2 for a meat pie recipe). Business Opportunity On returning to Seattle, Amphlett and Ferris continued working at their corporate jobs, but during their off-hours they would meet for beers at the Roanoke Tavern where they talked about launching the new meat pie business. They even registered the trade name, Aussie Pie, in case they later decided to introduce the concept of the Australian meat pie to American consumers. Amphlett was a regional manager of Starbucks, while Ferris was an assistant controller for Tully's Coffee Corporation. Amphlett started at Starbucks five years earlier after completing a history degree at AFL Web site: afl.com.au. From Wikipedia ibid. http://swengelsk.com/COOKING/AustralianFood.htm. Copyright 2006 Thunderbird, The Garvin School of International Management. All rights reserved. This case was prepared by Professor Graeme Rankine for the purpose of classroom discussion only , and not to indicate either effective or ineffective management C the University of Washington. Her job provided excellent experience in a broad range of activities including personnel, supply chain, production, and business development. After graduating from the University of Washington with an accounting and finance degree, Ferris began a two-year stint at PricewaterhouseCoopers (PWC) in the audit group. PWC's Seattle office had a large retail practice, so Ferris developed considerable retail experience by working on several large retail clients, including Nordstrom and REI. After two years at PWC, Ferris moved to the controller's office in the Seattle headquarters of Tully's Coffee Corporation. Establishing the Business Amphlett and Ferris used the kitchen in their home to develop more than 100 variations of the meat pie recipe, which they tested on friends and family. Finally, they hit upon a recipe which maintained the flavor of the authentic meat pie but contained less fat and sodium. Based on commercial prices, they estimated that the ingredients for the pie pastry and the filling such as ground beef, onions, flour, butter, and sauces, etc., would cost $1.20 per pie. Based on the production research in their home kitchen, they estimated that the amount of utilities consumed in making the pies would cost about $0.03 per pie. After conducting extensive surveys of passing customer traffic at Pike Place Market, they agreed that a reasonable initial sales price was $3.25 per pie, comparable to other fast foods such as burgers and hotdogs, which competed for customers' fast food dollars. Based on quotes from an industrial supplier, they estimated that it would cost $0.02 per pie for each pie box used for customer packaging at the point of sale. The entrepreneurial team felt that the ideal location in Seattle was a destination frequented by tourists who would be more likely to try new exotic foods. Market research suggested that Seattle's Pike Place Market on the Seattle waterfront close to Puget Sound ferries had excellent tourist traffic, particu- larly among the younger visitors. Discussions with commercial property managers prominent in Pike Place Market revealed that a large store of 4,000 square feet and the capacity to produce and sell 30,000 pics per month could be rented for $11,900 per month. Renting cooking equipment and fixtures would cost $8,000 per month and $5,000 per month, respectively. Amphlett and Ferris came up with a design for each store in which the meat pics would be made at the back of the store with a glass wall panel separating the front section so that customers could see the spotlessly clean facilities in which the pies were made. They felt that this would enhance the custom- crs' perception that Aussic Pies was a premium product using high quality ingredients and produced under impeccably sanitary conditions. Making meat pies at the store would require two full-time chefs at $1,800 per month. Only one full-time sales assistant would be needed at a monthly salary of $1,200 per month. Utility costs for lighting the store during business hours were estimated to be $300 per month. Business Decisions The business data Amphlett and Ferris had gathered was quite unsettling as they began to realize that it alone would not provide the answers they needed. They would soon have to make some important decisions that would have far-reaching consequences for the success of their business. 5. Assume that after the successful business operation in the first year the owners decided to change their location in the next year. After some careful investigation of various options the owners decided to set up their selling store in Alki Beach, Seattle. For this new selling store, they now have to pay a rental of $1000 per month. Their previous store will now be fully used for the production of meat pies from where they will deliver the pies to the final selling destination, the Alki beach. For the customers sitting arrangement on the beach, the owners decided to purchase some tables and benches; $120 per table & bench set X 10 = $12,000. The table and bench sets are expected to last next 5 years. From next year the two owners also decided to take fixed salary of $1000 each. Also the owners decided to give the sales personnel $.50 commission per pie sold, besides giving them fixed salary. Furthermore, in order to keep the pie production space meticulously clean the owners now want to spend $200 for supplies per month. The other costs given in the case (from first year of operation) will remain the same. a) Calculate the monthly fixed manufacturing overhead cost for the production of meat pies. [1] b) Calculate the monthly fixed selling and administrative cost. [1] c) Calculate the variable per unit cost of production of meat pies. [1] d) Calculate the per unit selling and administrative cost. [1] e) Calculate the new breakeven point in units. [1]