Question

Ms. Jenny Joy is planning to open her first own business project: a little café close to the university district of the imaginary town of Brightside. She has rented a small, but nice venue for the café. She has worked hard to keep the target opening date of 1 June. There is a very important report missing from her paperwork though; she does not know how much profit she can expect during the first 3 months of operation. She remembers from university finance class that the best way to prepare a profit plan is to consider different scenarios. She has gathered all the relevant information for the profit analysis and for the sake of simplicity estimated two possible outcomes: “good” and “almost good”.

Information about costs and revenues:
- Average revenue from drinks and food: €22 per person
- Cost of drinks and food: €14 per person
- Rent fee: €1000 per month
- Utilities: €1200 per quarter
- She does not plan to hire employees in the first three months.
- Renting the coffee machine: €6000 per year
- Other costs: €3000 in the first month and 5% less in every upcoming month

	Probability of scenario	Number of guests PER DAY (assume 20 working days per month)
Good scenario	55%	40
Almost good scenario	45%	30

Required:

1. Prepare a monthly analysis of Ms Joy’s profits based on her revenues and costs for the three months under both scenarios. (Please show all needed calculations and explanations)

2. Calculate her expected profit for the quarter

3. Name what are the variable and fixed costs from the above listed cost elements? Explain your answer.

4. Give two examples: one example of semi variable and one example of stepped costs that can be linked to the operation of the cafe?

Answer 1

The given information is related to the costs and revenues is as below

1. Average Revenue from drinks and food = €22 per person

2. Cost of drinks and food = € 14 per person

3. Rent Fee = €1000 per month. For First Quarter = €1000x3 = €3000 per Quarter

4. Utilities = € 1200 per quarter

5. Renting the Coffee Machine = € 6000 per year. As it is not mentioned if its a prepaid expense. We will require per quarter rate = €6000/4 = €1500

6. Other Cost = € 3000 in the first month and 5% less in every upcoming month which will be 5% less of € 3000 for 2nd month =  € 2850. For the 3rd month = 5% less of € 2850 = €2707.5.

Therefore Other cost for the first quater = € 3000 + € 2850 + € 2707.5 = € 8557.5

1.Now the calculations of Ms Joys Profit as per two scenarios are as below

First Scenario assumes the probability of 55% where in the Number of guests are 40 per day (assume 20 working days per month) hence the number of guests for the month will be 40x20= 800 and number of guests for the quarter will be 800x3= 2400

Second Scenario assumes the probability of 45% where in the Number of guests are 30 per day (assume 20 working days per month) hence the number of guests for the month will be 30x20= 600 and number of guests for the quarter will be 600x3= 1800

Lets calculate the Income statement of Ms Joys cafe for the Quarter

Particular	Scenario 1	Scenario 2
Average revenue from drinks and food	52800 (2400x22)	39600 (1800x22)
Cost of drinks and food	33600 (2400x14)	25200 (1800x14)
Gross Profit	19200	14400
Rent fees	3000	3000
Utilities	1200	1200
Renting the coffee machine	1500	1500
Other Costs	8557.5	8557.5
Net Profit	4942.5	142.5

2. Here the Variable Cost will be Other Costs and the Fixed Cost will Rent fees and Renting the coffee machine.

Variable Costs are simply the cost which can differ every month.

Fixed Costs are the the cost which will be the same every month.

3. Semi Variable Cost is a cost with both the components of fixed and variable cost.Costs are fixed at the production level and becomes variable after it exceeds that production level. Examples Utility Cost :- € 100 till one utilitiy used , it will be more if two utilities will be used. Cafe requires one unit per month but as per the demand increase it will utilise more then one unit.

Stepped costs are the cost will doesnt change even if there are increase in the volume. Example Rent is fixed for every month irrespective to the business growth.

4. Based on the Scenario 1 profit is €4942.5 and Scenario 2 profit is €142.5 as the almost good scenario there are lesses number of guests per day. If in this case the number of guests reduces per month. Ms Joys will start to face losses.Here for Ms Joy to increase her profits for the month, cost value for the drinks and food required to be decreased which respect to Product Cost reduction as margin delivered per person will increase.