Case Food Truck Business

You and your best friend recently graduated with a business diploma. Both of you have similar interest to start a business. Both of you have interest in food since young. Right after graduation you and your future business partner did some market research on the food industry and found out that one of the fastest growing segment in the food industry is the food truck segment which attracts mostly the young professionals and college students. Research shown that this particular market segment have the spending power and is willing to spend on quality, fast serving, and healthy food. You and your partner decided to start a food truck business offering quick and healthy burgers targeted at the young adult market.

Due to the high risk and very competitive market segment the partners decided, for the initial launch, to offer 2 items on the menu. The decision to limit the offering to two items is because it is easier to manage and more importantly maintain the quality of food to ensure that first time customers will have a pleasant experience and hope it will encourage repeat purchase. If the business goes well in the first three months, the plan is to gradually increase the number of items to the menu.

Below are descriptions of the two items that will be offered:

1. Sesame Bun Burger (SBB) 80 g quality beef pattie wrapped with two toasted whole wheat bread, topped with fresh lettuce, tomato, cheddar cheese, and special sauce served with french fries and carbonated soft drinks.
2. Soy Burger (SB) 100g of soya based pattie wrapped with two thick slices of sour dough bread and topped with sauted button mushroom served with sweet potato chips and iced green tea.

Below are forecasted cost data:

1. Initial start-up costs:
   1. Food truck:
   1. Purchase food truck for RM70,000, paid RM10,000 cash and taking RM60,000 loan from Small and Medium Enterprise (SME) program with an interest of 6% per annum with monthly interest payment.
   2. Estimated truck life 7 years with salvage value of RM20,000
   3. Straight line depreciation

1. 1. 2. Lap top computer with business programs:
         1. Purchase price RM3,600; paid cash
         2. Estimated life 3 years with no salvage value
         3. Straight line depreciation

1. 2. Standard raw material cost per serving:

Menu	Pattie	Bread	Toppings	Fries	Packaging	Drinks
Sesame Bun Burger (SBB)	RM3.00	RM0.50	RM1.50	RM0.80	RM0.20	RM0.50
Soy Burger (SB)	RM1.50	RM1.00	RM1.50	RM1.00	RM0.20	RM0.50

1. 3. Budgeted monthly fixed operating costs:

Budgeted Fixed Operating Cost Per Month
Activities	Operating Costs
Advertising	RM 50.00
Local council business permit	RM 80.00
Gas	RM 200.00
Food truck maintenance	RM 200.00
Petrol	RM 200.00
Utilities	RM 100.00
Food truck loan interest payment	RM ?
Worker salary*	RM 4,000.00
Food truck depreciation expense	RM ?
Computer depreciation expense	RM ?

*worker costs the whole operation will be managed by the two partners whom will be paid a monthly salary of RM 2,000. Besides the monthly salary, the two partners will also share profit earned.

1. Product Costing & Pricing (10 marks)

Below is the forecasted monthly demand for the first three months:

Menu	Forecasted Sales Units
	Month #1	Month #2	Month #3
Sesame Bun Burger (SBB)	1050	1176	1330
Soy Burger (SB)	450	504	570
Total units per month	1500	1680	1900

Required:

1. 1. Calculate the full absorption cost of each of the product. Monthly fixed overhead will be allocated to each product based on estimated units sold (you can use monthly cost and demand data to estimate unit costs).
2. 2. Determine the price of each product based on 50% cost mark-up.
3. 3. Prepare pro forma contribution margin income statement for each product for the first 3 months.

2. Budgeting (12 marks)
3. 1. Prepare a monthly raw material purchase budget for the first 3 months.

Below is information about raw materials purchase:

• To maintain the quality and freshness, raw materials are purchased every week (assume 4 weeks in a month).
• Due to weekly fluctuating demand, the partners planned to have a 10% minimum reserve (desired ending raw material inventory) of raw materials to anticipate any unexpected surge in weekly demand.

1. 2. Prepare a monthly raw material purchase payment schedule.

Below is information about raw materials purchase:

• All purchases are channelled through reliable suppliers who allowed Y&M 7 days credit.

1. 3. Prepare cash budget for the first 3 months of operations.

Below are cash receipts and payments information:

• All sales are cash basis
• Monthly operating expenses are paid in full in the month it is incurred.
• Monthly principle cash repayment for truck loan RM714/month
• Paid cash, RM3600 for purchase of computer at the start of the business.
• Truck loan interest incurred in the month will be paid at the end of the month.
• If there is a cash deficit for the month, business will borrow to cover the deficit at the beginning of the month at 12% interest per annum; interest will be paid on a monthly basis (interest incurred in the month of outstanding loan will be paid the beginning of the following month.
• Business want to maintain a minimum cash balance of RM1,000.
• Partners planned to start the business with RM1,000 cash.

1. 4. You and your partner decided to adopt cost mark-up method to set price (Cost/unit calculated in Part A).. Calculate the price of each product based on 50% mark-up and prepare a monthly pro forma Profit & Loss Statement for each product.