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: 6.1) 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) 6.2) Calculate her expected profit for the quarter [Finance for Managers – FINB101] – Examination, Version [A] Page 4 of 4 6.3) Name what are the variable and fixed costs from the above listed cost elements? Explain your answer. 6.4) 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

		Other Costs in Month 1	€              3,000
		Other Costs in Month 2	€              2,850	(3000*(1-0.05)
		Other Costs in Month 3	€              2,708	(2850*0.95)
		Total cost for three months	€              8,558
			Scenario
			Good	Almost good
	A	Number of guests per day	40	30
	B=A*20	Number of guests per month	800	600
	C=B*22	Revenue	€            17,600	€         13,200
	D=B*14	Cost of Drinks and food	€            11,200	€           8,400
	E	Rent Fee	€              1,000	€           1,000
	F	Utilities(1200/3)	€                  400	€               400
	G	Renting Coffee machine(6000/12)	€                  500	€               500
	H	Other Costs(8558/3)	€              2,853	€           2,853
	I=D+E+F+G+H	Total Monthly Cost	€            15,953	€         13,153
	J=C-I	Monthly Profit	€              1,648	€                 48
	K=J*3	Quarterly Profit	€              4,943	€               143
	p	Probability	0.55	0.45	SUM
	K*p	Probability* Profit	€              2,718	€                 64	€         2,783
		Expected Profit for the Quarter	€              2,783
		Variable Costs are costs that is directly proportional to Sales
		Fixed Costs are fixed per period
		Variable Cost
		Cost of Drinks and food
		Fixed Costs:
		Rent Fee
		Utilities(1200/3)
		Renting Coffee machine(6000/12)
		Other Costs(8558/3)
		Semi variable cost:
		Utilities can be semi variable
		Some amount fixed and remaining Variable
		Rent may be stepped cost
		Rent will increase with expansion of operations