Describe the Variable Cost, Fixed Cost and Startup Cost in this case.

The average household income of residents within five kilometres of this district was $114,748 in 2010.15 As well, the population that corresponded within this radius was 209,510,16 and with 65 per cent of Canadians drinking coffee on a regular basis, Lehnert calculated approximately 136,000 potential customers in the Kensington region. This number only included residents and did not include any of the added foot traffic that would be generated by this well-known shopping district. With more than 5.1 million tourists visiting Calgary per year,17 Lehnert estimated conservatively that 2 per cent of these tourists would visit the Kensington region.

The specific location that the partners were looking at was 1,571 square feet of retail space located next to Bernard Callebaut, a specialty chocolate shop, and Crave Cupcakes, a specialty bakery. The partners felt that they had a similar target market to both neighbouring stores, and so the location seemed to be a great fit. As well, they planned to source their baked goods from their neighbouring business on an as-needed basis and had negotiated an average cost of $1.25 per item. Lehnert had preliminary discussions with the landlord and felt that the partners would be able to secure a competitive five-year lease for $45 per square foot per annum. After meeting with a local contractor, they estimated that leasehold improvements would be required at approximately $35,000.

PRELIMINARY ESTIMATES

Lehnert worked with one of his fathers friends who had some experience in the restaurant business and developed a list of equipment and fixtures that would be required to open a cafe in such a premium location (see Exhibit 2).

He knew that they would also need very qualified and professional staff with wages at $16.00 per hour plus 20 per cent benefits. Lehnert hoped that the $16 wage rate compared to Albertas $9.40 minimum wage rate18 would be very attractive. The cafe would be open to the public from 6 a.m. to 11 p.m., seven days a week, and staff would be needed for 126 hours per week. The cafe would require two staff at all times. For the first year, Lehnert would stay on as manager and oversee all operations, but it was clear that he would need time to grow the business and continue his sourcing and outreach trips to Haiti, so the partners decided to hire a part-time manager who was a recent university graduate and train him or her to take over the position. Lehnert hoped to find a suitable candidate for $25,000 per year. Once they required a full-time manager, they expected to pay him or her an annual salary of $60,000.

The partners estimated that they would spend an initial $10,000 on marketing and promotion prior to opening and continue with a $1,000 monthly budget for the first year. They anticipated that annual utilities would run approximately $15 per square foot in addition to telephone and Internet charges of $300 per month. Lehnerts father had helped him obtain a quote from an insurance company to insure the contents of the cafe for a premium of $250 per month. Miscellaneous administrative costs were estimated to be $350 per month.

Other upfront costs would be legal fees, incorporation costs, licenses and permits, which were estimated at $10,000, plus a $2,000 utilities deposit and another $6,000 rental deposit. In addition, they would need to have someone professionally install and certify the roaster, which would cost approximately $10,000.

Monthly maintenance on the machines would be roughly $500.

PRICING

Lehnert spent considerable time working on his menu and figured an average price of $3.00 for regular drip coffee and $4.00 for specialty drinks such as espresso and lattes would be reasonable, particularly when compared to the average price of $5.25 at their closest competitor, Starbucks. There were numerous drink possibilities and numerous different sizes that Lehnert believed would be an important aspect when choosing the menu.

Their chosen location had decent foot traffic and was near a popular park, so the partners estimated they could sell between 200 and 300 drinks per day evenly split between regular drip and specialty drinks. The estimated average cost of a beverage would be 20 per cent of the selling price.19 They expected that 50 per cent of their daily customers would purchase a baked good along with their beverage at a price of $2.50. The partners further estimated that 10 per cent of their daily customers would purchase a bag of coffee for home use at $16.50 per 10-ounce bag. This price was identical to the planned online price and generated a 60 per cent margin.

RAISING CAPITAL

As the partners discussed their venture, they thought that between the three of them and their families they could raise $75,000, but this would clearly not be enough capital to get started. Lehnert was approached by one of his very wealthy friends who was interested in investing and was offered $250,000 for a 60 per cent stake in the business. The partners also considered the option of taking on either a line of credit or a fixed- rate term loan for the remaining capital needed.

After several long meetings discussing the potential financing options for the cafe, the partners decided that their best strategy would be taking on debt to finance the investment rather than giving up 60 per cent of their equity. With $75,000 in equity, they decided that they would need $250,000 in debt and that they were interested in a term loan with an interest rate of 13 per cent per annum plus a line of credit for any financing requirements above this amount. The partners had no doubt that the bank would require a guarantee from at least one of their parents to secure this level of debt.

The partners knew they would need a detailed business plan before any serious decisions could be made and before approaching a bank. Though they felt reasonably confident with their cost projections, they worried that their daily sales projections were more a gut feel rather than based on strong data. After many long hours and too many cups of their delicious coffee, the partners sat down to pull together their business plan and see if their cafe was just a dream or a dream about to come true.

Exhibit 2 EQUIPMENT REQUIREMENTS General Equipment Units Total Telephone System Computer System Espresso Machines Regular Coffee Machines Coffee Grinders Stereo System Cost per Unit $4,000 $1,000 2,000 8,000 8,000 4,000 3,000 3,000 28,000 4 S1,500 Roasting Equipment Roaster Packaging Heat Sealer Scales / Scoops 50,000 4,000 250 54,250 $50 Furniture Bar/ Roasting Station Tables Chairs Couches Shelves 20,000 15,000 6,000 2,000 4,000 47,000 15 60 4 $1,000 $100 $500 Other 10,000 5,000 15,000 Dcor Dishes, cutlery Total S 144,250