Current Business Report Creamelicious Ice Cream Parlor (CICP) offers casual life-style concept by offering variety selection of ice creams either for dine-in or take-away sets. The outlet has been operating since 2018 owned by Johan, a young entrepreneur who lost his job as a design engineer at a multinational engineering firm. 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 SME bank to be recovered within 3 years with interest rate of 10% pa. Sales has been growing at steady rate with revenues coming from both dine-in and take-away sales. Sales was slow in the initial stage. As customer confidence grew, sales doubled in the second year (2019) and expected to improve significantly in third year (2020). 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 increases profitability of his business. Nevertheless, direct cost is also affected by fluctuation of the price of raw material 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 current location, if the revenues continue as projected. For this he needs to know how good his current business (effective rate of return) is and if he were to sell his business, how much will the business worth (if the MARR is 20%). Furthermore, he is eyeing for 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 paid back within 3 years with interest rate of 8% pa. 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 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 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 fluctuation of direct costs (i.e. margin fluctuation from 50% to 70%).

Preparation of Case Study Brief

Johan need your assistance in preparing a business brief to highlight the health of his current business and the merit of the new business venture. Discussion should include analysis of his current business, in terms of costs, revenues, NPV, IRR and breakeven conditions. In order to consider expansion of the business, additional investment must also be justified in terms of economic viability, and sensitivity conditions. For the case study provided, you are expected to study and prepare a project brief that must include (but not limited to) the following steps of economic analysis:

1. Summary of project design requirement and constraints. 2. Tabulate all costs and revenues expected. State assumptions and project constraints in cash flow diagram and other suitable means. 3. Estimate net present values, equivalent annual costs, and wherever possible rate of return on investments. 4. Report on comparative analysis of potential options available, breakeven conditions and recovery period. 5. List and discuss project completion alternatives, investment alternatives and cost impact. 6. Identify critical factors that can influence decision through sensitivity analysis. 7. Provide recommendation of the most attractive options and indicate potential areas of concern.

[100 marks]

FY2018 FY2019 Revenue Dine-in Take-away Total Revenue 300,00 150,00 450,000 600,000 300,000 900,000 150,000 200,000 100,000 75,000 Direct Cost (Materials) Dine-in Take-away Total Direct Cost Gross Margin (Profit) Gross Margin (%) 225,000 225,000 300,000 600,000 50 67 Cost Item Descriptions Shop Rental Utilities & Transportation Repair & Maintenance IT Services RM5,000 per month for 2 years (2018 & 2019) 3% of total revenue RM500 per month for 2 years (2018 & 2019) RM500 per month for 2 years (2018 & 2019) RM100 per day for 22 days per month for 3 persons in 2018 and increased by 5% in 2019 RM200 per day for 22 days per month for 1 person in 2018 and increased by 5% in 2019 RM1,000 per year for the company Staff Salary Owner Salary Miscellaneous (tax, legal, etc.) FY2020 FY2021 FY2022 Revenue 1,200,000 Catering Bakery 1,000,000 500,000 1,500,000 550,000 1,750,000 1,400,000 600,000 2,000,000 Total Revenue Direct Cost (Materials) Catering 360,000 300,000 150,000 Bakery Total Direct Cost 400,000 200,000 600,000 1,400,000 165,000 525,000 1,225,000 450,000 1,050,000 Gross Margin (Profit) Gross Margin (%) 70 70 70 Cost Item Descriptions RM5,000 per month for 2 years (2020 & 2021) Shop Rental and will increase by 10% in 2022 Utilities & Transportation 3% of total revenue RM500 per month for 2 years (2020 & 2021) and Repair & Maintenance will increase by 10% in 2022 RM500 per month for 2 years (2020 & 2021) and IT Services will increase by 10% in 2022 RM110 per day for 22 days per month for 3 Staff Salary persons in 2020 and will increase by 5% every year onward RM300 per day for 22 days per month for 1 Owner Salary person in 2020 and will increase by 5% every year onward Miscellaneous (tax, legal, etc.) RM1,000 per year for the company FY2018 FY2019 Revenue Dine-in Take-away Total Revenue 300,00 150,00 450,000 600,000 300,000 900,000 150,000 200,000 100,000 75,000 Direct Cost (Materials) Dine-in Take-away Total Direct Cost Gross Margin (Profit) Gross Margin (%) 225,000 225,000 300,000 600,000 50 67 Cost Item Descriptions Shop Rental Utilities & Transportation Repair & Maintenance IT Services RM5,000 per month for 2 years (2018 & 2019) 3% of total revenue RM500 per month for 2 years (2018 & 2019) RM500 per month for 2 years (2018 & 2019) RM100 per day for 22 days per month for 3 persons in 2018 and increased by 5% in 2019 RM200 per day for 22 days per month for 1 person in 2018 and increased by 5% in 2019 RM1,000 per year for the company Staff Salary Owner Salary Miscellaneous (tax, legal, etc.) FY2020 FY2021 FY2022 Revenue 1,200,000 Catering Bakery 1,000,000 500,000 1,500,000 550,000 1,750,000 1,400,000 600,000 2,000,000 Total Revenue Direct Cost (Materials) Catering 360,000 300,000 150,000 Bakery Total Direct Cost 400,000 200,000 600,000 1,400,000 165,000 525,000 1,225,000 450,000 1,050,000 Gross Margin (Profit) Gross Margin (%) 70 70 70 Cost Item Descriptions RM5,000 per month for 2 years (2020 & 2021) Shop Rental and will increase by 10% in 2022 Utilities & Transportation 3% of total revenue RM500 per month for 2 years (2020 & 2021) and Repair & Maintenance will increase by 10% in 2022 RM500 per month for 2 years (2020 & 2021) and IT Services will increase by 10% in 2022 RM110 per day for 22 days per month for 3 Staff Salary persons in 2020 and will increase by 5% every year onward RM300 per day for 22 days per month for 1 Owner Salary person in 2020 and will increase by 5% every year onward Miscellaneous (tax, legal, etc.) RM1,000 per year for the company