Classic Coffee Company Husband and wife, John and Mae West, 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 John is selecting and making the coffee they serve Mae manages the front and back office selling coffee to customers, paying employees, and running ads for the coffee shop In its first year of operations the company sold 43,800 cups of coffee and had the below sales and cost figures Sales $ 131,400 Variable costs 30,660 Contribution margin 100,740 Fixed costs 52,000 Income before taxes 48,740 Income taxes (32 rate) 15,597 Net income $ 33,143 The husband and wife team know that another challenging and competitive year lies ahead of them Now entering their second year of operations, they are considering two alternatives and have hired your consulting group, known for its inventive business and accounting consulting work, 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 is products to include bakery items CCC would now experience higher sales amounts per customers since beverage sales may be accompanied with food sales This would, however, increase the companys variable costs since it would need to purchase the food items There will be an increase in the fixed costs of $30,000 for advertising to inform the public of this change The financial information is presented below, assuming the per sale amount is $3 00 under the regular scenario and $4 25 is the average per sale amount when food sales are added to the coffee shop Regular Bakery Sales $ 131,400 $ 248,200 Variable costs 30,660 82,125 Contribution margin 100,740 166,075 Fixed costs 52,000 82,000 Income before taxes 48,740 84,075 Income taxes (32 rate) 15,597 26,904 Net income $ 33,143 $ 57,171 Required Compute the company's contribution margin under both scenarios, if CCC decides to remain as their regular coffee shop and if they decide to include bakery items at their shop Compute the contribution margin both in total dollars and per unit Compute the company's contribution margin ratio under both scenarios (Note Do not round the CMR for accurate calculations in the following questions) Compute the break even point in sales dollars under each scenario How many customers will need to be served under each situation to break even Compute the operating leverage under each scenario What does this figure mean Why is it important to management Alternative 1 Requirements (continued) If the company wishes each scenario, regular coffee shop and bakery, to generate net income (after tax) of $170,000, what is the amount of sales that needs to be generated How many customers will then need to be served Prepare a contribution margin statement for this step and verify that your after tax net income in fact equals $170,000 for both scenarios Assume that the company expects customer sales to decline by 20 next year There will be no change in sales prices Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume a 32 tax rate, and that any loss before taxes yields a 32 tax savings) Assume that the company expects customer sales to increase by 20 next year There will be no change in sales prices Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume 32 tax rate, and that any loss before taxes yields a 32 tax savings) If sales greatly increase, which type of coffee shop would experience a greater increase in profit What if customer sales declined which shop would experience a greater loss or reduction in income Explain why How does your calculation from (4) support your point Thinking about coffee shop sales, is there any day of the week or time of day when greater sales are expected Which shop type (regular or bakery) is more sensitive to this occurrence Which product type is less sensitive to this occurrence Which product type is more advantageous and why Is there anything else the company can do to manage the decline in sales that come with certain days and times How do you recommend the company use the $30,000 advertising budget available under this scenario in order to achieve a maximum effect on their target audience Compute the Profit Margin and Return on Assets for each scenario assuming average total assets of $1,000,000 Industry averages are 30 and 5 respectively Classic Coffee Company Alternative 2 Drive Thru CCC is thinking about having a drive thru installed Having this amenity would help the coffee shop differentiate itself from its local competitors This would also increase CCCs customer base, allowing them to reach a greater customer base This added convenience would permit CCC to increase the price of its average coffee and would not increase the per unit variable costs for the company The construction of the drive thru would increase fixed costs by $150,000, which represent one time construction and installation costs This alternative is exclusive of alternative 1 so use the original financial information from page 1 (also shown below) to calculate the effects of the new equipment Sales $ 131,400 Variable costs 30,660 Contribution margin 100,740 Fixed costs 52,000 Income before taxes 48,740 Income taxes (32 rate) 15,597 Net income $ 33,143 Additional Information This alternative would allow CCC to increase their average sales price to $3 75 a cup of coffee and sell 91,250 cups of coffee in the upcoming year Compute the company's new contribution margin under this alternative Compute the contribution margin both in total dollars and per unit Compute the company's new contribution margin ratio Compute the break even point in sales dollars How customers will need to be served Compute the new operating leverage What does this figure mean Why is it important to management If the company wishes the coffee shop to generate net income (after tax) of $170,000, what is the amount of sales that needs to be generated How many cups of coffee will then need to be sold Prepare a contribution margin statement for this step and verify that your after tax net income in fact equals $170,000 Alternative 2 Requirements (continued) Assume that the company expects customer sales to decline 20 next year with no change in sales price Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above (assume a 32 tax rate, and that any loss before taxes yields a 32 tax savings) Assume that the company expects customer sales to increase 20 next year with no change in sales price Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above (assume 32 tax rate, and that any loss before taxes yields a 32 tax savings) If sales greatly increase, which type of coffee shop (bakery or drive thru) would experience a greater increase in profit What if customer sales declined which shop would experience a greater loss or reduction in income Explain why How does your calculation from (4) support your point Identify at least two advantages and disadvantages of having adding bakery items versus a drive thru 10 )Since no advertising budget is available under this alternative, what are some creative and low cost methods the company could employ to help advertise the addition of a drive thru to their coffee shop 11 )Compute the Profit Margin and Return on Assets assuming average total assets of $1,200,000 Industry averages are 12 and 5 respectively

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Classic Coffee Company Husband and wife, John and Mae West, decided to start their own business which would bring great coffee from all over the

Classic Coffee Company

Husband and wife, John and Mae West, 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. John is selecting and making the coffee they serve. Mae manages the front and back office; selling coffee to customers, paying employees, and running ads for the coffee shop.

In its first year of operations the company sold 43,800 cups of coffee and had the below sales and cost figures.

Sales	$ 131,400
Variable costs	30,660
Contribution margin	100,740
Fixed costs	52,000
Income before taxes	48,740
Income taxes (32% rate)	15,597
Net income	$ 33,143

The husband and wife team know that another challenging and competitive year lies ahead of them. Now entering their second year of operations, they are considering two alternatives and have hired your consulting group, known for its inventive business and accounting consulting work, 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 is products to include bakery items. CCC would now experience higher sales amounts per customers since beverage sales may be accompanied with food sales. This would, however, increase the companys variable costs since it would need to purchase the food items.

There will be an increase in the fixed costs of $30,000 for advertising to inform the public of this change. The financial information is presented below, assuming the per sale amount is $3.00 under the regular scenario and $4.25 is the average per sale amount when food sales are added to the coffee shop.

	Regular	Bakery
Sales	$ 131,400	$ 248,200
Variable costs	30,660	82,125
Contribution margin	100,740	166,075
Fixed costs	52,000	82,000
Income before taxes	48,740	84,075
Income taxes (32% rate)	15,597	26,904
Net income	$ 33,143	$ 57,171

Required:

Compute the company's contribution margin under both scenarios, if CCC decides to remain as their regular coffee shop and if they decide to include bakery items at their shop. Compute the contribution margin both in total dollars and per unit.

Compute the company's contribution margin ratio under both scenarios. (Note: Do not round the CMR for accurate calculations in the following questions).

Compute the break-even point in sales dollars under each scenario. How many customers will need to be served under each situation to break-even?

Compute the operating leverage under each scenario. What does this figure mean? Why is it important to management?

Alternative 1 Requirements (continued)

If the company wishes each scenario, regular coffee shop and bakery, to generate net income (after-tax) of $170,000, what is the amount of sales that needs to be generated? How many customers will then need to be served? Prepare a contribution margin statement for this step and verify that your after-tax net income in fact equals $170,000 for both scenarios.

Assume that the company expects customer sales to decline by 20% next year. There will be no change in sales prices. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume a 32% tax rate, and that any loss before taxes yields a 32% tax savings).

Assume that the company expects customer sales to increase by 20% next year. There will be no change in sales prices. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two types (assume 32% tax rate, and that any loss before taxes yields a 32% tax savings).

If sales greatly increase, which type of coffee shop would experience a greater increase in profit? What if customer sales declined -which shop would experience a greater loss or reduction in income? Explain why. How does your calculation from (4) support your point?

Thinking about coffee shop sales, is there any day of the week or time of day when greater sales are expected? Which shop type (regular or bakery) is more sensitive to this occurrence? Which product type is less sensitive to this occurrence? Which product type is more advantageous and why? Is there anything else the company can do to manage the decline in sales that come with certain days and times?

How do you recommend the company use the $30,000 advertising budget available under this scenario in order to achieve a maximum effect on their target audience?

Compute the Profit Margin and Return on Assets for each scenario assuming average total assets of $1,000,000. Industry averages are 30% and 5% respectively.

Classic Coffee Company

Alternative 2 Drive Thru

CCC is thinking about having a drive-thru installed. Having this amenity would help the coffee shop differentiate itself from its local competitors. This would also increase CCCs customer base, allowing them to reach a greater customer base. This added convenience would permit CCC to increase the price of its average coffee and would not increase the per unit variable costs for the company. The construction of the drive thru would increase fixed costs by $150,000, which represent one time construction and installation costs. This alternative is exclusive of alternative 1 -so use the original financial information from page 1 (also shown below) to calculate the effects of the new equipment.

Sales	$ 131,400
Variable costs	30,660
Contribution margin	100,740
Fixed costs	52,000
Income before taxes	48,740
Income taxes (32% rate)	15,597
Net income	$ 33,143

Additional Information:

This alternative would allow CCC to increase their average sales price to $3.75 a cup of coffee and sell 91,250 cups of coffee in the upcoming year.

Compute the company's new contribution margin under this alternative. Compute the contribution margin both in total dollars and per unit.

Compute the company's new contribution margin ratio.

Compute the break-even point in sales dollars. How customers will need to be served?

Compute the new operating leverage. What does this figure mean? Why is it important to management?

If the company wishes the coffee shop to generate net income (after-tax) of $170,000, what is the amount of sales that needs to be generated? How many cups of coffee will then need to be sold? Prepare a contribution margin statement for this step and verify that your after-tax net income in fact equals $170,000.

Alternative 2 Requirements (continued)

Assume that the company expects customer sales to decline 20% next year with no change in sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above (assume a 32% tax rate, and that any loss before taxes yields a 32% tax savings).

Assume that the company expects customer sales to increase 20% next year with no change in sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above (assume 32% tax rate, and that any loss before taxes yields a 32% tax savings).

If sales greatly increase, which type of coffee shop (bakery or drive-thru) would experience a greater increase in profit? What if customer sales declined -which shop would experience a greater loss or reduction in income? Explain why. How does your calculation from (4) support your point?

Identify at least two advantages and disadvantages of having adding bakery items versus a drive-thru.

10.)Since no advertising budget is available under this alternative, what are some creative and low-cost methods the company could employ to help advertise the addition of a drive thru to their coffee shop?

11.)Compute the Profit Margin and Return on Assets assuming average total assets of $1,200,000. Industry averages are 12% and 5% respectively.