Styles Title 1 No Spac... Su DEVELOPMENT OF THE CASE The case assumes students will open a milkshake shack on the beach of a resort on the "big Island" of Hawaii. I have studied existing restaurants, read industry reports, and have done some research on expected minimum costs to be incurred in operating the business. A unique feature of my milkshakes is that I will serve them with flavored straws that match the flavor of the chosen milkshakes by customers. My research embeds the following assumptions: Sales prices of milkshakes ($7.00 for small, and $10.00 for large) Cost of materials needed to make milkshakes: DIRECT MATERIAL INGREDIENTS Whole Milk ($15 for a 5 gallon 640 oz.) Cream ($20 for 1 gallon 128 oz.) Sugar ($10 for a 15 lb. bag 30 cups) Premium Vanilla Ice Cream ($24 for 600 oz.) Flavorings Flavored specialty straws Cups (500 8 oz. cups @ a cost of $200) Cups (500 12 oz. cups @ a cost of $250) Small (8 oz. size) (need 2 oz. of milk) (need 2 oz. of cream) (need cup of sugar) (need 6 oz. of ice cream). .25 per shake .75 per straw Large (12 oz. size) (need 3 oz. of milk) (need 3 oz. of cream) (need cup of sugar) (need 9 oz. of ice cream) 40 per shake .75 per straw Fixed costs: Shack rental: $500 a month Cleaning and other miscellaneous supplies: $100 a month Equipment: Industrial Milk Shake Maker: $72 per machine x 10 machines=$720 Equipment: Industrial Refrigerator/freezer: $480 Countertops: $1,200 Tables and benches for customers to sit outside: $108 per bench-set x 10-$1,080 Annual insurance: $600 a year Sign: use your marketing knowledge to think of a good name= $100 Advertising expenses: $5,000 a month Accounting and bookkeeping costs: $500 a month Owner's salary: $96,000 a year Dues and membership fees: $2,000 a year. Licenses and permit fees: $600 a year. Maintenance services: $400 a month. Office supplies: $300 a month. 4 WE ong Subtitle Title 1 No Spac... Sub Paragraph Styles Employees: Two part-time employees: each receiving a monthly salary of $800 (including benefits). Total Start-up Costs $20,247 for which were owner financed. Other costs: 10% of gross sales must be given to resort where shack will be located on its premises. Owner's capital will be used to cover direct materials' costs. REQUIREMENTS OF THE FIRST PART OF THE CASE In order to answer the questions below, you may make additional assumptions, and add/change fixed and variable costs (please clearly indicate all assumptions made). 1) Using the above information, determine the number of milkshakes you will need to sell to break- even. In order to do this, you will need to: Set a sales price (please use the competitors' sales prices first of $10 for Large, and $7 (for small). Please clearly state which costs are fixed and which are variable. (Hint: keep all costs on a monthly basis throughout your analysis). Clearly indicate what the TOTAL fixed costs are on a monthly basis. Also, please clearly indicate variable cost PER UNIT for both the small and large sizes. You will also need to vary assumptions about depreciable lives for long-term assets. The Sales mix you will use is that of 60% Large, and 40% small. You are to present the solution based on that sales mix. Therefore, you will need to calculate a weighted average contribution margin [($10-variable cost per unit for large) .60]+[($7- variable cost per unit for small) .40] 2) Finally, make a recommendation as to whether or not you should leave your job to open the milkshake shack? About the Author: Susan Machuga is an Associate Professor of Accounting at the University of Hartford. She obtained her PhD from the University of Massachusetts, Amherst, in 1996, and is also a CPA. She has published academic journal articles in numerous mainstream accounting journals such as Review of Quantitative Finance and Accounting, Advances in Quantitative Analysis of Finance and Accounting. Journal of International Accounting, Auditing and Taxation, and International Journal of Auditing, and received the Best Paper Award at the International Section of the American Accounting Association conference in 2008 for publishing her article in the reputable Journal of International Accounting Research. Her teaching and research interests are in the areas of Financial and Managerial Accounting; particularly the area of Earnings Management. W