Simran TeaSanctuary(STS)isalocalcafchaininVancouver,BritishColumbia,founded by Victor and Lucie Stone. STS's reputation was built around the cafbusiness;however,STSalsoownsasmallmanufacturingplantthatproduces

sustainably-sourcedbottledteas.Thecouplewantedtoprovidethecommunitywithorganicteaswhileactingresponsiblytowardtheenvironment.TheStoneshavejustretired, passing the business on to their daughter, Aurora, who shares a similarcommitmenttotheenvironmentandher community.

It is May 2020 and you, CPA, work as an independent consultant. You have beenapproachedbyAurora,whowouldlikeyouradviceonsomeofherrecentinitiativesandideas.

In2018,STSstartedtocapitalizeonthegrowingdemandforKombuchaafermentedtea drink that's supposed to offer several health benefitsby producing and selling itsownfresh, bottled Kombucha.

This year, Aurora started offering Kombucha-making classes to STS's customers.Based on the response from customers, Aurora thinks the Kombucha classes havebeenamassivesuccessbutshewouldliketoknowwhatclasssizesheneedstobreakeven, and to earn a target pre-tax profit of $200 per class. Aurora also wants to knowwhatpricesheneedstochargeinordertoearnhertargetprofitandwouldappreciateadiscussionofany qualitativeimpactsofsettingatargetprofit(AppendixI).

Aurora has noticed that the popularity of bottled Kombucha and Yerba Mate, an herbaltea, have increased dramatically over the past two years. Because of its fermentationprocess, Kombucha takes longer to produce and requires more space than STS's otherbottled teas. Aurora has been approached by a local company, Tea4U, who offered toproduce the bottled Kombucha for STS for $7.80 per bottle. Tea4U produces andsupplies high-quality bottled teas to STS's cafs and to other small distributors, and canproduce more bottlesthan STScurrentlyproduces. Althoughthecompanyhasonlybeen in operation for two years, Tea4U is growing rapidly and is known for its qualityproducts. If STS outsources the Kombucha production to Tea4U, it will have to share itsproprietaryrecipewithTea4U.Aurorawondersifsheshouldoutsourcebottled

KombuchatoTea4UandusetheresultingproductioncapacitytostartproducingYerbaMate tea instead (Appendix II).

Aurora has recently been approached about partnering with Organic Essentials Inc.(OEI),alargecompanybasedinVancouverthatsellsessentialoils.Shewouldlikeyouto analyzethisopportunityandtellherif thisisa goodfitforSTS(Appendix III).

Finally, as Aurora sees more opportunity in selling the bottled tea than in selling freshteainthecafs,sheisconsideringreplacingSTS'sexistingmanufacturingplantwithalarger facility. She would like you to analyze this expansion opportunity, which woulddoublethebottledteacapacity,usingthediscountedcashflowmodel(AppendixIV).

APPENDIX IKOMBUCHA-MAKINGCLASSES

STSoffersKombucha-makingclassesatitsmanufacturingplantonweekendmornings.Eachclassholds20students,who pay$25each,andthe classesarealwaysfull.

AurorapaysalocalKombuchamaker$250toteacheachclass.Studentsareprovidedwith ingredients to make a sample of Kombucha (cost of $3 per student) and a smallrecipebook to takehome (costof$4per student).

Eachstudentmayalsopurchaseonetakehomestarterkitatadiscountedpriceof$35,which is $5 above cost. These kits are normally sold in the cafs for $60. Auroraestimates that about 50% of students buy the kit. She wonders how the sales of starterkitsis impactingher pricingstrategy.

APPENDIXII

KOMBUCHAOUTSOURCINGANDYERBAMATEPRODUCTION

FinancialdetailsofcurrentKombuchaproduction

	Perbottle
Sellingprice	$8.50
Directmaterials(ingredients)	$1.50
Productionworkers(0.07hoursperbottle$14per hour)	$0.98
Packaging(labelsandbottles)1	$1.50
Shippingcosts1	$0.50
Currentdemand2	2,500bottlesper month

1Tea4U'spriceincludesthepackagingcostsbutnottheshippingcosts.

2Tea4Uhassufficientcapacitytodeliver2,500bottlespermonth.

IfSTSdecidestooutsourceKombuchaproductiontoTea4U,itcanusethevacantspacetoproduce anadditional3,000bottlesofYerba Matepermonth.

FinancialdetailsofYerbaMateproduction

	Perbottle
Sellingprice	$6.00
Directmaterials(ingredients)	$0.50
Productionworkers(0.02hoursperbottle$14per hour)	$0.28
Packaging(labelsandbottles)	$1.50
Shippingcosts	$0.50

Fixedcostsrelatedtothemanufacturingplantareasfollows:

	Permonth
Productionmanager'ssalary	$5,500
Marketingcostsforallbottledteaproducts	$1,000
Otherfixedcosts(facilitylease,equipmentdepreciation, etc.)	$15,000

APPENDIXIIIORGANICESSENTIALSINC.(OEI)

One of Aurora's friends recently started working for OEI. OEI commercialized the sale ofessential oils by successfully finding the cheapest and most efficient way to harvest andextractessentialoils fromplantsand flowerslocated alloverthe world.

Aurora's friend told her that market studies have shown that those who enjoy organictea are more likely to also have an interest in essential oils; therefore, she thinks STSand OEI would make a perfect partnership. Aurora has never tried OEI's products but,given thecompany's rapidgrowth,notesthatthey seem popular.

AsallOEIproductsaresoldonconsignment,therewouldbenocosttoSTS.OEIwouldsend sales agents to STS's cafs to distribute free samples to customers and talk tothemaboutthebenefitsoftheproducts.AurorathinksthismightbeonewaytodiversifySTS'sproductofferings, whichcurrentlyconsistofteaandKombucha.

OEI was recently reported in the media as having caused extensive environmentaldamageinthecountrieswheretheiressentialoilsareextracted.Inthepast,therehavealso been rumours that OEI's manufacturing facilities abroad are not well maintained,anditsemployeesaretreated poorly.

APPENDIXIV

FACILITYEXPANSIONANDADDITIONALEQUIPMENT

IfAuroradecidestoexpand,productionatthenewfacilitywouldstartin 2021.STSrequiresa12%returnfor allof itsinvestmentprojects.

Leasingcosts-Year11	$240,000
Fixedcosts-Year12	$75,000
Initialsetupcostsunrelatedtonewequipment	$40,000
Additionalcontributionmarginperbottle	$ 3.80
Costofnewequipmentrequired	$58,500
Usefullife,newequipment	7years
Salvagevalueattheendofusefullife	$15,000

NotesSTSexpectstoproduceandsellanadditional66,000bottlesofteainthefirstyear. This additional volume will increase by 15% each year from Years 2 to 5 and willremainthe sameas Year5 for the remainingtwoyears.

Ignoretaxinyouranalysis.

1STS would sign a contract for a 7-year lease, with lease payments increasing by 2%annually.

2STSexpectsa1%increaseperyearinfixedcostsforthenextsevenyears.Fixedcostsincludethedepreciation costof thenewequipment.