Simran Tea Sanctuary (STS) is a local caf chain in Vancouver, British Columbia, founded by Victor and Lucie Stone. STSs reputation was built around the caf business; however, STS also owns a small manufacturing plant that produces sustainably-sourced bottled teas. The couple wanted to provide the community with organic teas while acting responsibly toward the environment. The Stones have just retired, passing the business on to their daughter, Aurora, who shares a similar commitment to the environment and her community.

It is May 2020 and you, CPA, work as an independent consultant. You have been approached by Aurora, who would like your advice on some of her recent initiatives and ideas.

In 2018, STS started to capitalize on the growing demand for Kombuchaa fermented tea drink thats supposed to offer several health benefitsby producing and selling its own fresh, bottled Kombucha.

This year, Aurora started offering Kombucha-making classes to STSs customers. Based on the response from customers, Aurora thinks the Kombucha classes have been a massive success but she would like to know what class size she needs to break even, and to earn a target pre-tax profit of $200 per class. Aurora also wants to know what price she needs to charge in order to earn her target profit and would appreciate a discussion of any qualitative impacts of setting a target profit (Appendix I).

Aurora has noticed that the popularity of bottled Kombucha and Yerba Mate, an herbal tea, have increased dramatically over the past two years. Because of its fermentation process, Kombucha takes longer to produce and requires more space than STSs other bottled teas. Aurora has been approached by a local company, Tea4U, who offered to produce the bottled Kombucha for STS for $7.80 per bottle. Tea4U produces and supplies high-quality bottled teas to STSs cafs and to other small distributors, and can produce more bottles than STS currently produces. Although the company has only been in operation for two years, Tea4U is growing rapidly and is known for its quality products. If STS outsources the Kombucha production to Tea4U, it will have to share its proprietary recipe with Tea4U. Aurora wonders if she should outsource bottled

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Kombucha to Tea4U and use the resulting production capacity to start producing Yerba Mate tea instead (Appendix II).

Aurora has recently been approached about partnering with Organic Essentials Inc. (OEI), a large company based in Vancouver that sells essential oils. She would like you to analyze this opportunity and tell her if this is a good fit for STS (Appendix III).

Finally, as Aurora sees more opportunity in selling the bottled tea than in selling fresh tea in the cafs, she is considering replacing STSs existing manufacturing plant with a larger facility. She would like you to analyze this expansion opportunity, which would double the bottled tea capacity, using the discounted cash flow model (Appendix IV).

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APPENDIX I KOMBUCHA-MAKING CLASSES

STS offers Kombucha-making classes at its manufacturing plant on weekend mornings. Each class holds 20 students, who pay $25 each, and the classes are always full. Aurora pays a local Kombucha maker $250 to teach each class. Students are provided with ingredients to make a sample of Kombucha (cost of $3 per student) and a small recipe book to take home (cost of $4 per student).

Each student may also purchase one take home starter kit at a discounted price of $35, which is $5 above cost. These kits are normally sold in the cafs for $60. Aurora estimates that about 50% of students buy the kit. She wonders how the sales of starter kits is impacting her pricing strategy.

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APPENDIX II KOMBUCHA OUTSOURCING AND YERBA MATE PRODUCTION

Financial details of current Kombucha production

Case

	Per bottle
Selling price	$8.50
Direct materials (ingredients)	$1.50
Production workers (0.07 hours per bottle $14 per hour)	$0.98
Packaging (labels and bottles)1	$1.50
Shipping costs1	$0.50
Current demand2	2,500 bottles per month

1 Tea4Us price includes the packaging costs but not the shipping costs. 2 Tea4U has sufficient capacity to deliver 2,500 bottles per month.

If STS decides to outsource Kombucha production to Tea4U, it can use the vacant space to produce an additional 3,000 bottles of Yerba Mate per month.

Financial details of Yerba Mate production

	Per bottle
Selling price	$6.00
Direct materials (ingredients)	$0.50
Production workers (0.02 hours per bottle $14 per hour)	$0.28
Packaging (labels and bottles)	$1.50
Shipping costs	$0.50

Fixed costs related to the manufacturing plant are as follows:

	Per month
Production managers salary	$ 5,500
Marketing costs for all bottled tea products	$ 1,000
Other fixed costs (facility lease, equipment depreciation, etc.)	$15,000

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APPENDIX III ORGANIC ESSENTIALS INC. (OEI)

One of Auroras friends recently started working for OEI. OEI commercialized the sale of essential oils by successfully finding the cheapest and most efficient way to harvest and extract essential oils from plants and flowers located all over the world.

Auroras friend told her that market studies have shown that those who enjoy organic tea are more likely to also have an interest in essential oils; therefore, she thinks STS and OEI would make a perfect partnership. Aurora has never tried OEIs products but, given the companys rapid growth, notes that they seem popular.

As all OEI products are sold on consignment, there would be no cost to STS. OEI would send sales agents to STSs cafs to distribute free samples to customers and talk to them about the benefits of the products. Aurora thinks this might be one way to diversify STSs product offerings, which currently consist of tea and Kombucha.

OEI was recently reported in the media as having caused extensive environmental damage in the countries where their essential oils are extracted. In the past, there have also been rumours that OEIs manufacturing facilities abroad are not well maintained, and its employees are treated poorly.

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APPENDIX IV FACILITY EXPANSION AND ADDITIONAL EQUIPMENT

If Aurora decides to expand, production at the new facility would start in 2021. STS requires a 12% return for all of its investment projects.

Leasing costs Year 1	$240,000
Fixed costs Year 1	$ 75,000
Initial setup costs unrelated to new equipment	$ 40,000
Additional contribution margin per bottle	$ 3.80
Cost of new equipment required	$ 58,500
Useful life, new equipment	7 years
Salvage value at the end of useful life	$ 15,000

Notes STS expects to produce and sell an additional 66,000 bottles of tea in the first year. This additional volume will increase by 15% each year from Years 2 to 5 and will remain the same as Year 5 for the remaining two years.

Ignore tax in your analysis.

1 STS would sign a contract for a 7-year lease, with lease payments increasing by 2% annually. 2 STS expects a 1% increase per year in fixed costs for the next seven years. Fixed costs

include the depreciation cost of the new equipment.