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STARTING THE BUSINESS When looking to start a business around her empanadas, Angie first considered a large-scale rollout of pre-packaged empanadas for grocery stores and

STARTING THE BUSINESS

When looking to start a business around her empanadas, Angie first considered a large-scale rollout of pre-packaged empanadas for grocery stores and big-box retailers but quickly realized that option was premature. She then decided to explore the possibility of a smaller-scale rollout, selling empanadas to local restaurants.

Over the next few days, Angie did some basic research and found that there were about 800 restaurants in the local metropolitan area. Because empanadas are common throughout Latin America, she narrowed the prime target market to some form of Latin American food. She found approximately 100 restaurants that could be classified as Latin American, with the majority identifiable as Mexican restaurants. Of these, she identified 21 as national or regional chains such as Taco Bell and Chipotle Mexican Grill. Angie identified a local chain of seven restaurants as unsuited for the product. This left 72 restaurants that she labeled prime target customers.

Digging further, Angie made a second list of non-Latino restaurants and bars that might be interested in her empanadas. Excluding national chains and types of cuisine that were obviously a poor fit, she pared down the list to 130 in total.

At the same time, she was perfecting her recipes and estimating costs. She identified a few fully equipped kitchens she could rent for between $700 and $2,000 a month, depending on size, equipment, and location. She also estimated the cost of other items, including ingredients, labor, trays, utilities, and delivery. Then she classified each cost as fixed, variable, or mixed based on the advice of her accountant. After some additional market testing and interactions with potential clients, Angie prepared a six-month budget (see Table 1).

Angie's Empanadas opened on April 1. The business is located in a metropolitan area with a total population of about 400,000. The area houses a university with approximately 20,000 students, several private colleges, and a technical college. Both the university and the technical college offer restaurant administration degrees. The primary local industries are agriculture and light manufacturing.

Angie signed a one-year lease on a kitchen near the university that would provide sufficient capacity and a ready labor supply to help her reach her short-term profit goal of $4,000 per month by the end of the first year. She feels the business needs to make at least that much profit to be worth her time. Otherwise, she will pursue her talent for photography.

Angie does much of the preparation and assembly of the empanadas herself, but she hires additional labor as needed, mostly students, to help make and deliver the product. The preparation and assembly is done by hand, and the dough needs to be made daily. This means labor is a relatively large part of the product's cost.

Because the ingredients are organic, they also are relatively costly. Angie relies on quality and excellent taste to differentiate her products, but she's also trying to keep the price low to gain a foothold in the market. She purchases the trays locally, and they are recyclable but not reusable, meaning she must use new trays for every batch.

SIX-MONTH BUDGET REVIEW

In early October, Angie compared the actual results for the first six months after the launch of her business to her original budget (see Table 2). She had expected to grow her business slowly, so she was excited when she realized that she had sold 569 more trays than budgeted and her profit exceeded the budgeted semiannual profit by $435. She was also delighted by her monthly sales figures, which had exceeded expectations each of the last four months.

Based on her early success, Angie is thinking of expanding her operation to a larger space and investing in kitchen equipment as well as other assets, such as delivery trucks. But her part-time accountant isn't as excited. He did some additional analysis across the three types of empanadas and found that the overall cost per tray for each type differs significantly (see Table 3), yet they are all priced the same. He doubts that she could reach her goal of $4,000 a month in profit by the end of the first year without making some price changes.

SPECIAL ORDER

Angie recently received an inquiry from one of her customers, a local organic restaurant and catering company, asking for special pricing for large-event orders. Angie previously provided the customer with an order of 50 trays of empanadas in September. The catering company picked up the trays at Angie's kitchen, saving delivery costs, and said it would continue to do so.

The customer would standardize its order at 40% vegetarian empanadas, 40% Peruvian, and 20% Argentinian, but it would also require a more expensive tray ($0.75 per unit vs. the current cost of $0.30) that can double as a serving dish. This customer would also provide extended lead times for the orders. Angie doesn't expect that the additional orders would impact her other customers. She sees this as a good opportunity but is unsure what price to quote this customer so that both sides would benefit.

Angie recognized that she needs some professional help and hired your consulting team to advise her on financial planning and analysis to evaluate the first six months of operations. She also wants advice on how to reach her profit goals.

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Table 1 : SIX MONTH BUDGET APRIL SEPTEMBER APRI JUNE JULY AUGUS SEPTEMBER TOTAL Trays sold 300 500 650 1,100 3. 350 ales revenue $3 450 $4 025 85 , 17 $5, 750 $7 , 475 $12, 650 $38 , 525 Cost of sales Ingredients 8725 $845 $1 087 81 207 $1. 570 $2657 $8 091 Labor 1 035 208 1552 379 17. 558 Tray 135 195 330 1005 Rent 000 OOO 1000 1000 1000 1000 6000 Utilities 125 835 Delivery 650 700 800 850 1000 450 5 450 Total cost of sales $3 621 $3 983 $4.70 $5 067 $6 154 $9 409 832 939 Operating profit $ (170 ) $42 $470 $68 $1 321 83. 247 85 58 NOTE - MIXED COSTS VARIABLE COST PER TRAY FIXED COST PERMONTH Utilities 50.0 $100 Delivery $7.00 $350Table 2 ACTUAL RESULTS APRIL - SEPTEMBER APRIL JUNE JULY AUGUST SEPTEMBER TOTAL Trays sold 340 290 Sales revenue 53.450 $3 910 85 , 405 $7 728 89 747 $14, 835 $45 069 Cost of sales Ingredients $725 8901 87 . 214 $7 760 $2 212 83. 255 $10 067 Labor 1.139 784 2.550 3 , 214 4 896 14 873 Trays 202 387 1 .176 Rent 1000 OOO 1.000 1000 1000 1000 6000 Utilities 190 Delivery 865 056 6058 Total cost of sales $3740 $4, 124 85 , 17 $6 715 $8 078 871 27 $39 048 Operating prof ($290) ($214 ) $289 $1 013 $1 6 63 83 560 $6 021 NOTE - MIXED COSTS ACTUAL FIXED COST PER MONTH Utilities $100 Delivery 8350Table 3: ACTUAL INGREDIENT COST BY TYPE AND SALES MIX BY MONTH PERUVIAN ARGENTINIAN QUANTITY VEGETARIAN (CHICKEN) (BEEF) April 300 20% 40% 40% May 340 5% 45% 50% June 470 10% 42% 48% July 672 8% 42% 50% August 847 8% 43% 49% September 1,290 12% 44% 44% Total 3,919 10% 43% 47% Cost per tray $1.265 $2.300 $3.105

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