Please answer the follow 3 questions for 5.1 TeaTime.com:

1. Using a case format, conduct a report to Patrick highlighting the issues facing TeaTime.com.
2. Using the information from Exhibit 2, develop an Income Statement based on activity-based costing information
3. Include recommendations as to what Patrick should do to turn a profit.

5.1 TeaTime.com After it} years of working as an internal auditor at a large insurance company, Patrick Tickers decided to realize his dream of rtmning his own business. He had a young family and wanted the exibility in hours that a small business would provide. His job at the insurance company gave him the chance to travel to Asia, where he developed a love of ne tea. After years of dreaming. planning. and saving. he started TeaTime.com in January sols. While he expected business to be slow at rst. he was disappointed in the nancial results in his rst year ofoperations. [See Exhibit 1.) TeaTime.com is an on-line company that provides a premium tea delivery service to its members. For $2i} per month, members receive a package containing four different blends of loose-leaf tea, which is care- fully selected by Patrick through his contacts in Asia. Each month the blends of tea changes. allowing Patrick to fulll his goals of bringing a variety of premium Asian tea to the Canadian market as well as supporting many of the small tea producers he got to know in his travels to Asia. Patrick did his research before deciding to open TeaTime.com. Tea is one of the most popular drinks in the world and consumption of tea in Canada is increasing as consumers are becoming more aware of its health benets. Patrick felt that busy Canadians would appreciate the convenience of having premium tea delivered to their door and that the u monthly fee would be enough to cover his costs plus give him some income to support his family. The business model Patrick set up is simple. Members subscribe to the service on the TeaTime.com web- site. After oompleting a form with name, address, and credit card information, members start receiving their monthly boxes of tea. Recognizing that members may need to suspend deliveries for vacations or other reasons, the website has a spot where members can pause and restart their accounts at any time. Members can also access a discussion board where they can leave comments about their favourite blends of tea. The tea is pre-ordered from Asia and packaged in TeaTime.com's office space, which Patrick rents from his uncle at a reasonable rate. Demand was strong enough in the rst year that Patrick needed to hire four part-time staff to help him run the company. One staff member is responsible for the website and the member accounts. The other three package the tea and send it to members. Being close to a large university. Patrick easily lled the four part time positions with students hoping to earn some extra money. Because of Patrick's experience in Asia. he has kept control ofselecting and ordering the tea from the Asian suppliers. With his background in internal audit, Patrick keeps tight control of the company operations. Despite all of Patrick's hard work, he is worried about whether his business will be able to generate enough prot to support his family. He knows that competition is tough, with premium tea shops in many convenient locations. Ifhe could increase the number of members, he believes TeaTime.com could become protable. He remembers learning about activity-based costing in university and wants to see ifit could be used to help his company. He gured he would talk to his staff to see if they could provide any insight on the various activities of the business. [The information they provided is in Exhibit 2.) If TeaTime.com did not start to generate prots, he might have to go back to work at the insurance company. He was very well respected when he resigned, and his boss did say to contact him in the future if he ever needed work. Required 1. Using a case format. prepare a report to Patrick highlighting the issues facing TeaTime.com. 2. Using the information from Exhibit 2, develop an income Statement based on activity-based costing information. 3. Include recommendations as to what Patrick should do to turn a prot. Sales [dlfbox x 324 boxes per month} Cost of goods sold (Hillier: X 324 bosses per month} Gross margin Selling and administrative expenses Shipping Marketing (website maintenance and advertising} Rent General and administrative Total selling and administrative cirpenses Operating income Note: l{lost of goods sold includes only the cost ofIiJe tea. All xed overhead costs are included in selling and administrative expenses. EIHIBIT 2 - IHFDHMA'I'IDH FROM STAFF ABOUT THE OPERATIONS 0F TEATIMESDH After talking with his staii about TeaTirne.corn's selling and administrative expenses, Patrick decides to gather activity-based costing information for the shipping and general and administrative expenses and cre- ates four activityI cost pools. Shipping expenses are put in a \"Package and ship tea" activity, and general and administrative expenses are split into three activities: \"Set up member accounts.\" \"Process pause and restart requests.\" and \"Support members." The following information was gathered from discussions with his sta' about these activities for their rst pear of operations. Cost drivers were selected by Patrick and activity rates were determined through discussions with Patrick and his staiib}.r estimating the percentage of time they spend on each activity. WWW... wwwumm moms... \" Process pause and restart Number of pause and $49534 per request requests restart requests Support members Number of members \" $3.333 per member