Classic Coffee Company
Best friends, Nathan and Cody, decided to start their own business which would bring great coffee from all over the world to their local community. Together they have formed Classic Coffee Company, or CCC (assume their coffee shop is located a few miles from a college campus). Nathan is selecting and making the coffee they serve. Cody manages the front and back office, selling coffee to customers, paying employees, and running ads for the coffee shop. Last year, the company sold 48,800 units and had the below sales and cost figures. The team have been in business for 2 years. With competition rising in the coffee industry, they know that another challenging and competitive year lies ahead of them. They are considering two alternatives and have hired you to help them make some important business decisions.
Classic Coffee Company Alternative 1'- Bakery Facing stiff competition from other coffee and beverage shops, Classic Coffee Company (CCC) is considering expanding its products to include bakery items. CCC would now experience higher average sales amounts per customer since beverage sales may be accompanied with food sales. This would, however, increase the company's variable costs since it would need to purchase the food items from outside vendors. The following data pertains to adding the bakery option: Total sales in the number of units would increase 25% with the added bakery option. The average sales price per unit would increase from the current $2.75 to $4.00 when food sales are added to the coffee shop. The variable cost per unit would increase to $1.50 per unit to account for the added cost of bakery items. There would be an increase in fixed costs of $30,000 for advertising to inform the public of this change. Alternative 2 Drive Thru CCC is thinking about having a drive-thru installed. Having this amenity would help the coffee shop increase its customer base, allowing them to reach a greater number of customers. This added convenience would permit 000 to slightly increase the price of its average coffee and would not increase the per unit variable costs for the company. The following data pertains to adding the drive-thru option: This alternative is exclusive of alternative 1 Total sales in the number of units would double what it was last year. The construction of the drive-thru would increase xed costs by $130,000 which represents one-time construction and installation costs. This alternative would allow 000 to increase their average sales price to $3.30 a cup of coffee and their variable cost per unit would remain the same. Compute the company's contribution margin under all three scenarios (Current, Alternative 1 Bakery, and Alternative 2 Drive-thru). Compute the contribution margin both in total dollars and dollar per unit. Compute the company's contribution margin ratio under all three scenarios. (Note: DO NOT round the CMR for accurate calculations in the following questions) Compute the break-even point both in units and in sales dollars under all three scenarios. If the company wishes to generate target income of $175,000 (which after-tax would be $122,500), what is the amount of sales that needs to be generated? How many sales units will then need to be served? Prepare a contribution margin (CVP) Income Statement for this step and verify that your after-tax net income in fact equals $122,500 for all three scenarios. Assume that the company expects customer sales to decline by 20% next year. There will be no change in sales prices. Prepare forecasted nancial results for next year following the format of the contribution margin (CVP) income statement for each of the three scenarios (assume a 30% tax rate). Assume that the company expects customer sales to increase by 20% next year. There will be no change in sales prices. Prepare forecasted nancial results for next year following the format of the contribution margin (CVP) income statement for each of the three scenarios (assume a 30% tax rate). Identify at least two advantages and disadvantages of adding bakery items versus a drive thru. If sales greatly decreaselor increase, which alternative has the greatest change in net income? Compute the Prot Margin and Return on Assets for each scenario assuming average total assets currently are $300,000; average total assets for bakery would be $500,000 and average total assets for drive-thru would be $700,000. Industry averages are 30% prot margin and 5% RCA. Summary: Comparing your calculations from alternative 1 and alternative 2 - which alternative do you recommend to Nathan and Cody? Why? The company can only pick one of the alternatives, due to the time and resources involved, so you will need to make a compelling case to support your decision. Be sure to identify any assumptions used in your analysis. Your summary report will need to state your choice for either alternative 1 OR 2. Must include financial analysis from Part A
