Comparing calculations from alternative 1 and alternative 2 - which alternative is recommend to Nathan and Cody?Why?The company can only pick one of the alternatives, due to the time and resources involved. Make a compelling case to support your decision.Identify any assumptions used in the analysis. State the choice for either alternative 1 OR 2.Must include financial analysis
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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 our 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 gures. Sales $ 134,200.00 Variable Costs $ 29,280.00 Contribution Margin $ 104,920.00 Fixed Costs $ 52,000.00 Income Before Taxes $ 52,920.00 Income Tax .- $ 15,876.00 Net Income $ 37,044.00 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 xed 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 CCC 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 CCC to increase their average sales price to $3.30 a cup of coffee and their variable cost per unit would remain the same
