Yogi Bubble Tea

You recently graduated with a business diploma. During your tenure as a student, you were one of the many college students who were die-hard fan of the "Bubble Tea" trend. You and most of your college friends consume bubble tea at least twice a week.

The "Bubble Tea" market has grown at an exponential rate the last two years. One of the reasons is that it was perceived as a healthy lifestyle drink compare to ice blended coffee served in lifestyle caf.

Recently studies shown that the high sugar content in bubble3 tea product out-weight the health benefit of tea in bubble tea drinks. These have caused concerns to many die-hard bubble tea customers. Recently, there is a sharp decline in the growth rate of bubble tea market. Many bubble tea outlets closed down and many more are expected to close in the future.

Recently, you and family went on vacation to Australia and you observed that the bubble tea trend is alive and thriving, especially the yogurt based bubble tea, which is supposed to be healthier than regular milk/sugar based bubble tea.

Right after graduation you are contemplating to start a small yogurt-based bubble tea outlet targeting college students. You decided to do some market research and the main focus of your research is to find out whether the business can survive, at least in the short run (1 year). Due to lack of funds, you decided to rent all the equipment and not to invest "hard cash" in capital expenditure (equipment):

The following were forecasted cost and market information gathered during your research.

Cost information:

Fixed operating expenses per month:

Monthly rentalRM4,000

Helper salaryRM3,000

Depreciation expensesRM1.500

Electricity expensesRM500

Wireless internetRM150

Advertising expenseRM500

Budgeted raw material per unit*:

Tapioca ballsRM1.00

Tea leavesRM0.75

YogurtRM1.25

Sweetener/flavourRM1.00

Packaging/cupRM0.50

Market information:

• Bubble tea trend is slowing down due to the negative publicity about the excessive sugar used.
• Economy seems to be picking up
• Current and new potential customers might be looking for a healthier alternative.
• The business expects customers are willing to pay RM9.00 for a cup healthier yogurt based bubble tea.

Further research indicated that expected sales for the first three months of business are as follows:

January February March April May June

Expected sales (units) 1,200 1800 2400 ? ? ?

Other Information:

The first three (3) months sales are expected to growth at an abnormal rate due to new unique offering in the bubble tea segment. Sales are expected to slow down and sales are expected to grow at a constant rate of 10 percent from April onwards.

Required: [ Show the calculation and formula so i can more understand, thank you :) ]

A.Determine the monthly expected sales for the period January to June.(1 mark)

B.Due to fluctuating expected sales, you are concern that you will run short of products for sale on a daily basis. To ensure every customer will never be turn away due to shortage of finish goods, you plan to produce 10% more each day than the daily expected sales. Assume 30 day month and you open for business every day.

Prepare daily production budget (only need to do the first 2 days and last 2 days of the month) for the period January to June. (4 marks)

C. Prepare weekly raw material purchase budget:(4 Marks)

In order to maintain freshness of the final product, raw material purchases on a weekly basis.

Need to maintain 10% (weekly sales need) raw material inventory at all time.

D. Prepare weekly raw material purchase payment schedule/budget:(2 Marks)

Payment will be paid a week after the purchase date.

E.Prepare cash budget on a monthly basis.(5 Marks)

Additional information:

Started with initial $1,000 cash

Raw material purchase payment schedule - purchases are paid in full before the next purchase.

100% ofsales are cash sales

At any one time your business must have a cash balance of $500

If there is a cash deficit, the company can borrow the bank at 12% interest per year. Interest will paid on a monthly basis and interest incurred for the month will be paid the following month.

F.Prepare monthly Pro forma Income Statement for the period January to March. (4 Marks)

G.The following are actual and budgeted sales and cost information for the last 3 months, January, February, and March.

January February March

Actual Budgeted Actual Budgeted Actual Budgeted

Actual sales (units) 1400 1200 1900 1800 2400 2400

Monthly rental 4000 4000 4000 4000 4000 4000

Waiter salary 3000 3000 3000 3000 3000 3000

Electricity expenses 510 600 510 600 510 600

Wireless internet 250 250 250 250 250 250

Advertising expenses 500 500 500 500 500 500

Raw Materials:

Tapioca balls 1450 1200 2100 1800 2500 2400

Tea leaves 1000 900 1400 1350 1820 1800

Yogurt 1800 1500 2300 2250 3050 3000

Sweetener/flavour 1300 1200 1700 1800 2100 2400

Packaging/cup 600 600 850 900 1100 1200

Total costs 5400 6150 8100 8350 10800 10527

i. Prepare flexible budget for the month of January, February, and March and calculate the cost variances of each cost items. (2 marks)

ii. According the March performance report in part (i), what are the possible causes of the favourable/unfavourable cost variances. Recommend appropriate corrective actions to prevent further cost issues.(2 marks)

H.Based on the budgeted costs per month:

i.Calculate the break-even quantity per month.(1 mark)

ii.Calculate the monthly unit sales required that will generate a before tax profit of $1,000 monthly.(1 mark)

iii.Marketing research indicated for the month of April, overall unit sales will increase by 50% if the company implement sales promotion offering customers one (1) free drink for every four (4) purchase at current price of $9.00. The free units are considered as unit sold.`(4 marks)

a)Calculate the new break-even units.

b)If expected sales, with sales promotion, for April is 2,000 units, do you recommend go ahead with the sales promotion? Why? Support your decision by comparing income before and after.