Learning objectives: 1. Analysis of a new venture and the competitive environment. 2. Identify relevant costs and types of costs: fixed, variable, start up. 3. Financing new ventures: income statement budget and cash budget. 4. Contribution margin, break-even and sensitivity analysis. 5. Evaluate ROI and pricing strategy. 6. Sustainability and corporate social responsibility. Assignment questions: Rob Lehnert has approached you, a management consultant, to evaluate the new venture of Caf Xaragua for its projected profitability and cash flow management. In a group of 3-4 people, prepare a report for Caf Xaragua. In your report: 1. Categorize and make separate list of the start-up costs, ongoing fixed and variable costs for Caf Xaragua. Variable costs would be presented as the per unit cost. Fixed costs must be presented in the annual amount. Also prepare a list of the sales items and selling prices. (15 marks). Note: Assume that Lehnert would be paid $35,000 for part-time management for Year 1. In Year 2 full time managers position will replace the part-time positions. Capital assets can be depreciated over 10 years with zero residual value. When estimating staff costs, check your assumption for the reasonableness test. 2. Prepare budget (annual) contribution margin income statements for Year 1 and Year 2 assuming 250 total daily drinks. Show detailed revenues for individual products and detailed variable and fixed costs information in the statements. (15 marks) 3. Compute the break-even in sales revenue for 2nd year for the company as a whole (including all products). Compute the margin of safety and MOS%. What is the DOL for Year 2? Interpret the numbers that you have computed for BE, MOS and DOL. (9 marks)

2 4. Other than the compensation for Lehnert as manager, the partners are expecting a before-tax profit of $60,000. Calculate the sales revenue to achieve the target profit in Year 2. Comment on Caf Xaraguas ability to meet the target (3 marks).

					Annual	Per Unit				Staff Wage ($16):
				Start Up	Fixed Costs	Variable Costs				126 hrs per week
										Open 6am to 11pm to the public and half hour to open store and close the store (equalling 1hr per day)
			Lease improvements	35,000						Open 7 days a week
			Initial marketing	12,000						20% of wages benefits
			Monthly marketing (1000x12)		12,000					2 Staff at all times - first shift 5:30am to 2:30pm - second shift 2:30 pm to11:30pm
			Lease (1,571 sq. ft x $45)		70,695					8 hours x $16= 128 and 1 hour (Overtime) x (16+24)= 40 for a total of $168
			Utilities (1571 x 15$)			23,565
			Insurance (250 x 12)		3,000
			Administrative costs (350x12)		4,200
			Staff Wages			$4,032 / week
			Staffe Benefits 20%			$806.40 / week
			Upfront startup costs (legal fees)	10,000
			Utilities deposit	2,000
			Rental deposit	6,000
1571 square foot			Install roaster	10,000
			Roaster		50,000
			Monthly maintenance roaster		6,000
			Scales/scoops		250
			Packaging heat sealer		4,000
			Telephone system		2,000
			Computer system (2x4000)		8000
			Espresso machine		8000
			Regular coffee machines (4x1000)		4000
			Coffee grinders (2x1500)		3000
			Stereo systems		3000
			Bar/roasting station		20000
			Tables (15x1000)		15000
			Chairs (60x100)		6000
			Couches ( 4x500)		2000
			Shelves		4000
			Dcor		10000
			Dishes, cutlery		5000
			Total	75,000	240145	23565
136,00 potentail regional customer
2% of 5.1 million tourist
Baked goods average $1.25 per item
5 year lease $45.00 per squre foot