In about seven weeks, you will be heading home for winter break. A local not-for-profit (NFP) organization (Funtime) is planning to participate in an annual winter carnival as an annual fund raising project and has offered you an opportunity to operate its booth. Please refer to the NFP organization as Funtime throughout the project.
WHAT WILL YOU BE SELLING?
In this booth, you will be selling a single food item highly popular at winter carnivals and festivals known as a “beaver tail”. Basically, it is fried dough that is prepared in batches ahead of time and fried using a hot oil fryer as orders are received from customers. Customers may have options to add various toppings (such as fresh fruit, fruit preserves, and chocolate sauce). You may consider what topping(s) you are willing to offer and extra topping costs should be included in the selling price of your beaver tail.
During the operation, you will be responsible for purchasing all materials and ingredients needed, producing and selling the beaver tails as well as hiring all of your help if needed.
HOW LONG IS YOUR OPERATION?
The carnival will run for five days from 4:00 pm – midnight local time.
WHAT WILL OPERATING EXPENSES INCLUDE?
A number of operating expenses will be incurred during the five days. First, 12.5% of your gross sales revenue will be charged by the Wintertime Amusement Company (the operator of the winter carnival who provides the booth space). Second, 12.5% of your gross sales revenue will go to Funtime as its commission for providing you the booth including lighting and utilities. Third, Funtime will provide its frying equipment to you at a cost of $250 per day. This fryer equipment can fry eight beaver tails at a time but only one fryer can be used due to the size of the booth. The rental charge does not include the oil needed to fry the beaver tail.
In past years, annual attendance at the carnival is approximately equal to 453,550 over the five days of the carnival. Sales of beaver tails by all of the various vendors including the booth operator on behalf of Funtime has historically been approximately 10% of the carnival attendance, so it is a very competitive market for this short term.
You will need to perform market research to determine an appropriate price for your beaver tails.
GETTING STARTED ON THE ANALYSIS
Your analysis will require you to think like an entrepreneur, deal with ambiguity, and make informed judgments as you determine the practicality and financial viability of this business venture.
To do so, you will need to determine all the ingredients of the product to make and related materials to sell it; understand the production process to make the product and get it ready for sale; and identify and research all other costs (direct or indirect) associated with this undertaking.
Thus, as you proceed, you will need to decide what data to collect (e.g., various costs, set up and production times, capacity to make enough product to make a profit) and where and how to find this information. In addition, you will need to organize, analyze, and communicate information in a way that makes sense to you and to others (in particular, the reviewer – your instructor). For example, you may need to recruit one or more associates to work with you to staff the booth, produce the product, and sell it.
- (5 points) Determine your financial goal for this five-day venture. Specifically, how much money do you expect to make on a net basis? The booth will need to operate for 40 hours so if you have an opportunity to take a temporary job for a week over winter break, you should expect to net at least as much as your net earnings would be for the week. Keep in mind you will also have to set up the operation before you open up for business as well as to close it down after operating hours each day. Briefly describe how you established this goal.
- (15 points) Briefly describe the product (that is, is it just a beaver tail or will you include additional toppings) you will sell at the carnival as well as all of the costs that you will likely incur during the week. Identify and define an appropriate cost driver for each cost. Classify each cost as variable, fixed, or mixed for the carnival time horizon. For mixed costs, if any, be sure to identify the variable and fixed components using linear regression or the high–low method. Please note that it is highly unlikely you will find any mixed costs. Use the format below.
|Cost Item||Cost Type (Fixed, Mixed, Variable)||Cost Driver (if applicable)||Explanation if needed|
|E.g. Equipment Rental|
To find these costs, you will need to perform research to determine the actual costs of your beaver tail production, including direct materials, direct labor, and overhead costs involved in making your product. In addition to the information provided above, document your sources for each of these costs. Be sure to list every ingredient used in making the beaver tail along with topping(s) ingredients, if offered, using the above format.
Note: You may choose to do some “window” shopping to verify prices and/or actually make the product to verify the quantities of the ingredients to make a batch of fried beaver tails. Alternatively, there are YouTube videos that can help you do this. For example, see https://youtu.be/1LeRh_DgYhU – be sure to note how many beaver tails are made from the recipe in this video (that is, a batch) so you can estimate the direct (that is, material and labor) costs to produce a beaver tail. Also, keep in mind what other items you will need to prepare and serve a fried beaver tail to a customer.
- (20 points) Using the cost information you found in part B, classify these costs into the production costs of direct materials, direct labor, and overhead and selling and administrative costs for a beaver tail. Use the formats below in this section. An example of each type of cost is provided. You will first need to determine how many beaver tails you can produce in a batch and then determine the cost per unit = that is, the beaver tail.
Direct Material (per batch of X Beaver tails and per beaver tail produced)
|Cost Item||Quantity per Batch||Cost per batch ($)||Cost per unit ($)||Cost Type||Source of cost estimate|
Direct Labor (per batch of X beaver tails and per beaver tail produced)
|Cost Item||Hours per Batch||Cost per hour||Cost per unit ($)||Cost Type||Source of cost estimate|
|Cost Item||Overhead Production Cost||Cost Type||Source of estimate|
|Fryer Equipment||$1,250||Fixed||Project information|
Selling and Administrative Cost
|Cost Item||Cost||Cost Type||Source of estimate cost|
|Booth Rental||$.125*Your selling price*units sold||Variable||Project Scenario|
- (5 points) Perform market research to estimate the appropriate price to charge for a beaver tail. Keep in mind that your chosen selling price will be partly a function of your financial goal and partly market-determined (i.e., the price needs to be realistic competitively). State your price per beaver tail and the source(s) you used to establish the price.
Selling Price per beaver tail____________ Source(s)____________________
- (35 points) To ensure that this business venture is a viable idea and not a waste of your time, you need to perform a CVP analysis. This analysis provides the basis for assessing the reasonableness of this business opportunity. Using your answers for part B through D, determine the following:
- The contribution margin per unit of your product? ____________
- The contribution margin ratio? ________________
- Total fixed costs? __________________
- Sales volume in units at the break-even point? ________________
- Sales revenue in dollars at the break-even point? ______________
- Sales volume in units required to reach your financial goal? ___________
- Sales revenue in dollars required to reach your financial goal? _________
Provide supporting documentation for your analysis in the form of a contribution spreadsheet using the format below
Contribution Income Statement Format for Cost-Volume-Profit Analysis
|Item||Price or cost per unit||No. of Units||Total|
|Variable costs (list each cost)|
|Fixed Cost (list each cost)|
- (10 points) In no more than two pages, summarize your results and calculate your operating income per hour to determine if this opportunity is worth your time.
- (10 points) Write a brief (1page) memo addressed to the Executive Director of Funtime to advise the director whether or not you will accept the opportunity and why. This memo should be essentially an executive summary of the project. (E.g., Mr. Feelcold, Executive Director, Funtime, Frozen Lake, MN 55805).
Your Final Report consisting of Sections A through G above. Please note: your final report should not exceed 10 pages including your narratives and tables or exhibits. You may use this project scenario as a template to organize and submit your project report.