Creamilicious Ice Cream Parlor (CICP) offers a casual lifestyle concept by offering a variety selection of ice creams either for dine-in or take-away sets. The outlet has been operating since 2019 owned by Johan, a young entrepreneur who lost his job as a design engineer at a multinational engineering firm due to the Covid-19 pandemic. He put up an initial investment of RM200,000 to buy the required equipment and initial renovations. He managed to secure a business loan from an SME bank to be recovered within 3 years with an interest rate of 10% per annum. Sales have been growing at a steady rate with revenues coming from both dine-in and takeaway sales. Sales were slow in the initial business start. As customer confidence grew, sales doubled in 2020 and are expected to improve significantly in 2021. It is estimated that the direct costs from raw materials for the business to be 50% of the revenues and reducing to 30% as their efficiency improved, thus improving the profit margin. The annual revenues for the business are shown in TABLE 1.

As expected, salary and rental would form a significant portion of the operating expenditure. Utilities, transportation, equipment repair, and general maintenance also form part of the costs. Furthermore, other forms of commitment including tax, legal fee, etc. are lumped into miscellaneous expenses. All budgeted expenses are tabulated in TABLE 2. For simplicity in analyzing the business profitability, the expenses are calculated based on the budgeted value rather than the actual costs.

TABLE 1 : CICP Original Business Revenues and Cost of Materials (annual statement of income)

TABLE 2 : CICP Original Expenses (monthly estimations)

It is noticed that improvement in efficiency has reduced the direct costs in the current ventures, thus increase the profitability of the business. Nevertheless, direct cost is also affected by fluctuation of the price of raw materials and transportation. Johan needs to consider the bottom line to remain healthy in the presence of this variability.

Moving forward, Johan plans to continue his current business at the present location, if the revenues continue as projected. For this, he needs to know how good the current business (effective rate of return) is and if he were to sell his business, how much the business is worth (if his MARR is 20%). Furthermore, he is eyeing a new location to start his second shop and probably start a franchise in the future.

Business Expansion Plan

Johan plans to expand his business to a new site. He plans to put up an initial investment of RM300,000 to buy the required equipment and initial renovations. As he has a good track record, he expects to secure a business loan from the same SME bank to be recovered within 3 years with an interest rate of 8% per annum. As before he expects sales to grow at steady rate with revenues coming from the outlet. As customer confidence is already secured, sales are expected to double and the margin to remain steady at 70%. The projected annual revenues for the business are shown in TABLE 3, where all values are based on projection. As before, salary and rental would form a significant portion of the operating expenditure. Utilities, transportation, equipment repair, general maintenance, and miscellaneous expenses are tabulated in TABLE 4.

TABLE 3 : CICP NEW Business Revenues and Cost of Materials (annual statement of income)

TABLE 4 : CICP NEW Business Expenses (monthly estimations)

As before improvement in efficiency is expected to reduce the direct costs in the current ventures, thus increase the profitability of his business. Nevertheless, direct cost is also affected by fluctuation of the price of raw material and transportation. In preparing the business plan, he needs to prepare the sensitivity analysis in the fluctuation of direct costs (i.e margin fluctuation from 50% to 70%).

Preparation of Business Expansion Brief

For the case study provided, you are expected to study and prepare a project brief that highlights the health of the business and the merit to expand the business venture. The project brief must include the following items of economic analysis:

1. Summary of project design requirements and constraints.
2. List and discuss project completion alternatives and cost impact.
3. State assumptions and project constraints.
4. Tabulate all costs and benefits expected.
5. Report on comparative analysis of potential options available.
6. Identify critical factors that can influence decisions through sensitivity analysis.
7. Provide recommendations of the most attractive options and indicate potential areas of concern.

FY2019 FY2020 Item Revenue Dine-in Take-away Total Revenue 300,000 150,000 450,000 600,000 300,000 900,000 Direct Cost (Materials) 150,000 75,000 200,000 225,000 100,000 300,000 Dine-in Take-away Total Direct Cost Gross Margin (Profit) Gross Margin (%) 225,000 50 600,000 67 Cost Item Shop Rental Utilities & Transportation Repair & Maintenance IT Services Descriptions RM5,000 per month for 2 years (2019 & 2020) 3% of total revenue Staff Salary RM500 per month for 2 years (2019 & 2020) RM500 per month for 2 years (2019 & 2020) RM100 per day per person for 22 days per month for 3 persons in 2019 and increase by 5% in 2020 RM200 per day for 22 days per month for 1 person in 2019 and increase by 5% in 2020 Owner Salary Miscellaneous (tax, legal, etc.) RM1,000 annually FY2021 FY2022 FY2023 1,000,000 500,000 1,500,000 1,200,000 550,000 1,750,000 1,400,000 600,000 2,000,000 Item Revenue Catering Bakery Total Revenue Direct Cost (Materials) Catering Bakery Total Direct Cost Gross Margin (Profit) Gross Margin (%) 300,000 150,000 450,000 360,000 165,000 525,000 400,000 200,000 600,000 1,050,000 1,225,000 70 1,400,000 70 70 Cost Item Shop Rental Utilities & Transportation Repair & Maintenance IT Services Descriptions RM5,000 per month for 2 years (2021 & 2022) and will increase by 10% in 2023 3% of total revenue RM500 per month for 2 years (2021 & 2022) and will increase by 10% in 2023 RM500 per month for 2 years (2021 & 2022) and will increase by 10% in 2023 RM110 per day per person for 22 days per month for 3 persons in 2021 and with annual increase of 5% every year onward RM300 per day for 22 days per month for 1 person in 2021 and increase by 5% every year onward RM1,000 annually Staff Salary Owner Salary Miscellaneous (tax, legal, etc.)