Having discovered that customers wanted to make larger orders for special events and other circumstances, Chips started promoting the sale of boxes of cookies. Customers could still buy a box of 4 for $10, but if they bought more than 1 box, they would get a $1 discount per box. The board is concerned about its impact on gross margin but believes that it will improve profitability going forward. Also, based on the results from last year and this year, the board has been investigating starting a catering business, which would take advantage of the customers' desire to buy in larger quantities and the brand recognition that has been established. Chips has become popular and known for its quality. After doing some discovery-driven planning, they found that Boise would not be a big enough market to make it work. But, they have done some further investigation and testing and found that this could work in Salt Lake City. The Chips brand has been very successful and would be expanded to include muffins and cupcakes. They have put together some rough plans and need our analysis to see if it makes sense. Please prepare the board report by providing answers and analysis in the Chips (Year 4) assignment document found above. Be sure to include the items requested, including a summary when requested. On some of the questions, you need to use your own judgment as to what analysis to provide. Be sure to be thorough in your answers. Part 1 1. Analyze the sales for 2023 vs. 2022. Use your judgment as to what methods to use to analyze (it could be variance analysis, Price Volume Mix analysis, by store, by cookie, or other analysis). You may also do some trend analysis by bringing in revenue information from 2020 and 2021. Make sure you are understanding the major story lines and use your analyses (use more than 1 method of analysis) to tell the story of what happened with sales. Summarize your analysis. 2. Analyze the gross margin $ and % for 2023 vs. 2022. Use your judgment as to what methods to use to analyze it. You may also do some trend analysis by bringing in gross margin information from 2020 and 2021. Make sure you are understanding the major story lines and use the analyses (use more than 1 method of analysis) to tell the story of what happened with the gross margin. Summarize your analysis. 3. The board is concerned that our operating expenses increased by 6.4% over last year. I am not as concerned. Prepare a common-size income statement for the 2 years for me to show to the board to alleviate their concerns. In your common-size income statement, show only the 2 years' percentages side by side. Summarize your analysis. 4. The board is concerned that we are not managing our working capital as efficiently as we could be. Is their concern justified? How are we doing compared to Year 2 (2021)? Analyze the working capital, in particular our days of cash, days of A/R, days of Inventory, and days of A/P to help you answer the question. 5. The board is concerned that our net income percent continues to be fairly low. Present a ratio that demonstrates that the owners, who are expecting a 15% return, should not be concerned. Explain why. 6. Write a narrative of the results for 2023. In the narrative be sure to include comparisons to 2022 results. Also be sure to include the following sections: Summary, Revenue, Gross Margin, Operating Expenses, and Cash Flow/Balance Sheet. Part 2 The board would like an analysis of the catering opportunity in Salt Lake City. Instead of leasing a facility, they would like to purchase a small building and the associated equipment. They want to understand the capital requirements and the "finance" break-even number of unit sales. | Part 2 The board would like an analysis of the catering opportunity in Salt Lake City. Instead of leasing a facility, they would like to purchase a small building and the associated equipment. They want to understand the capital requirements and the "finance" break-even number of unit sales. | They have done some preliminary investigation and have the following information: - A building could be purchased for $575,000. A mortgage (amortizing loan) could be obtained for 75% of the price at a 6.5% interest rate. - 2 delivery vans could be purchased for a total of $80,000. An amortizing loan could be obtained for 95% of the price at a 7.0% interest rate. - Equipment could be purchased for a total of $80,000. - Working Capital needs (for cash, inventory, A/R, and A/P ) would be $85,000. - An interest-only line of credit loan of $75,000 could be obtained at a 9.0% interest rate. Funds from the line of credit could be used to finance the equipment or other capital needs. To minimize the need for more investor money, we will use all of that loan. - Total operating expenses (fixed expenses) would be $250,000 per year (these expenses will be paid out of the working capital). - The average selling price of the products would be $2.50 and the average cost (including material and labor) would be $1.55. - The tax rate is 25%. 1. What is the total capital needed to fund the catering business (i.e., how much total capital is needed to pay for the building, vans, equipment, and working capital)? Based on the loans that have been lined up, how much would be debt? Therefore, how much investor money do we need? Summarize in a table that shows the details of the debt and equity (investor money) that is needed to fund the business. 2. Using the debt and equity calculated in Part 2, question 1, and assuming that investors expect a 15% return, what is the lowest IRR \% this business can generate to make this a worthwhile investment? (Don't over-complicate. What is the minimum IRR that would be acceptable?) 3. What is the annual "finance" break-even sales volume needed for the catering business (make sure to include the cost of capital)? Assuming we are baking 26 days per month (Monday through Saturday), how many dozen products do we need to make and sell per day? 4. As we decide how to capitalize this new venture, what are the advantages and disadvantages of bringing in new investors vs raising the capital via debt? In other words, what are the pros and cons of new investors and what are the pros and cons of using debt (use bullet points). 5. Do you think we should run the catering business as a separate business unit or combined with its cookie-store business? Why or why not? Support your answer. \begin{tabular}{|c|c|c|c|c|} \hline A & \multicolumn{2}{|r|}{ B } & \multicolumn{2}{|r|}{ C } \\ \hline & \multicolumn{2}{|c|}{2022 (Year 3) } & \multicolumn{2}{|c|}{\begin{tabular}{c} 2023 (Year 4) \\ Actual \end{tabular}} \\ \hline Revenue & $ & 1,329,514 & $ & 1,468,206 \\ \hline 5 & & & & \\ \hline Material Cost of Goods Sold & $ & 573,021 & $ & 648,050 \\ \hline Labor Cost of Goods Sold & $ & 202,202 & $ & 224,498 \\ \hline Total Cost of Goods Sold & $ & 775,223 & $ & 872,548 \\ \hline 0 Gross Margin & $ & 554,291 & $ & 595,658 \\ \hline 1 Gross Margin \% & & 41.7% & & 40.6% \\ \hline & & & & \\ \hline 3 Operating Expenses & & & & \\ \hline 4 Lease Expense & $ & 113,150 & $ & 115,413 \\ \hline 5 Utilities Expense & $ & 45,838 & $ & 51,484 \\ \hline 6 Manager Salary Expense & $ & 125,460 & $ & 128,597 \\ \hline 7 Manager Salary PT\&B Expense & $ & 39,262 & $ & 40,959 \\ \hline 8 Hourly Wage Expense & $ & 88,778 & $ & 91,743 \\ \hline 9 Hourly Wage PT\&B Expense & $ & 5,504 & $ & 5,688 \\ \hline 0 Marketing Expense & $ & 24,268 & $ & 37,585 \\ \hline 1 Professional Services Expense & $ & 29,483 & $ & 34,646 \\ \hline 2 Office Supplies and Misc Supplies Expense & $ & 3,098 & $ & 4,297 \\ \hline 3 Repairs and Maintenance Expense & $ & 12,476 & $ & 15,776 \\ \hline 4 Insurance Expense & $ & 14,225 & $ & 8,078 \\ \hline 5 Depreciation Expense & $ & 13,390 & $ & 13,390 \\ \hline 6 Total Operating Expenses & $ & 514,932 & $ & 547,656 \\ \hline & & & & \\ \hline 8 Earnings Before Interest and Taxes & $ & 39,359 & $ & 48,002 \\ \hline & & & & \\ \hline 0 Interest Expense & $ & 2,703 & $ & 786 \\ \hline 1 Tax Expense & $ & 9,164 & $ & 11,804 \\ \hline 2 Net Income & $ & 27,492 & $ & 35,412 \\ \hline 3 Net Income \% & & 2.1% & & 2.4% \\ \hline & & & & \\ \hline Chips & & & & \\ \hline Balance Sheet & & & & \\ \hline & & & & \\ \hline Current Assets & & & & \\ \hline 9 Cash & $ & 114,877 & $ & 134,284 \\ \hline 0 Accounts Receivable & $ & 11,043 & $ & 13,246 \\ \hline Inventory & $ & 22,919 & $ & 29,477 \\ \hline 2 Total Current Assets & $ & 148,839 & $ & 177,007 \\ \hline & & & & \\ \hline Equipment and Leasehold Improvements & $ & 133,896 & $ & 133,896 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|} \hline \multicolumn{5}{|l|}{ Current Assets } \\ \hline Cash & $ & 114,877 & $ & 134,284 \\ \hline Accounts Receivable & $ & 11,043 & $ & 13,246 \\ \hline Inventory & $ & 22,919 & $ & 29,477 \\ \hline Total Current Assets & $ & 148,839 & $ & 177,007 \\ \hline Equipment and Leasehold Improvements & $ & 133,896 & $ & 133,896 \\ \hline Accumulated Depreciation & $ & (77,932) & $ & (91,322) \\ \hline Total Fixed Assets & $ & 55,964 & $ & 42,574 \\ \hline Total Assets & $ & 204,803 & $ & 219,581 \\ \hline \multicolumn{5}{|l|}{ Current Liabilities } \\ \hline Accounts Payable & $ & 37,783 & $ & 38,477 \\ \hline Taxes Payable & $ & 9,164 & $ & 11,804 \\ \hline Total Current Liabilities & $ & 46,947 & $ & 50,281 \\ \hline Long-term Debt & $ & 33,791 & $ & 9,823 \\ \hline Total Liabilities & $ & 80,738 & $ & 60,104 \\ \hline Stock & $ & 100,000 & $ & 100,000 \\ \hline Retained Earnings & $ & 24,065 & $ & 59,477 \\ \hline Total Equity & $ & 124,065 & $ & 159,477 \\ \hline Total Liabilities and Equity & $ & 204,803 & $ & 219,581 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|} \hline A & \multicolumn{2}{|c|}{ B } & \multicolumn{2}{|c|}{ C } \\ \hline \multicolumn{5}{|l|}{ Chips } \\ \hline \multicolumn{5}{|l|}{ Salaries and Wages } \\ \hline \multicolumn{5}{|l|}{ PT\&B (Payroll Taxes and Benefits) } \\ \hline & \multicolumn{2}{|c|}{\begin{tabular}{c} 2022 (Year 3) \\ Actual \end{tabular}} & \multicolumn{2}{|c|}{\begin{tabular}{c} 2023 (Year 4) \\ Actual \end{tabular}} \\ \hline Manager Salary & $ & 62,730 & $ & 64,298 \\ \hline Managers (1 per Store) & \multicolumn{4}{|c|}{2} \\ \hline Total Managers' Salary & $ & 125,460 & $ & 128,597 \\ \hline Managers' Payroll Taxes (6.2\%) & $ & 7,779 & $ & 7,973 \\ \hline Managers' Benefits & $ & 31,483 & $ & 32,986 \\ \hline Managers' Total PT\&B & $ & 39,262 & $ & 40,959 \\ \hline Hourly Workers (per Hour) & $ & 9.50 & $ & 9.70 \\ \hline \multicolumn{5}{|l|}{ Bakers: } \\ \hline Direct Labor Hours - Actual & & 20,042 & & 21,793 \\ \hline Direct Labor Wages & $ & 190,397 & $ & 211,392 \\ \hline Direct Labor Payroll Taxes (6.2\%) & $ & 11,805 & $ & 13,106 \\ \hline Direct Labor Cost of Goods Sold & $ & 202,202 & $ & 224,498 \\ \hline \multicolumn{5}{|l|}{ Store Front: } \\ \hline Opeating Expense Labor Hours - Actual & & 9,345 & & 9,458 \\ \hline Total Wages - Operating Expenses & $ & 88,778 & $ & 91,743 \\ \hline Payroll Taxes (6.2\%) & $ & 5,504 & $ & 5,688 \\ \hline Total Operating Expense Wages and PT\&B & $ & 94,282 & $ & 97,431 \\ \hline \end{tabular}