Carribean Internet Cafe

Topics: Variable cost, Costs, Management accounting Pages: 5 (1249 words) Published: March 31, 2013
Assignment #1:
Caribbean Intern Café

Date: November 14, 2012

1. There are many issues that Mr. Grant should consider before proceeding with the CIC. There are several things that Mr. Grant should examine before even looking at the projections given to him. Total capital is $2,250,000, $1,000,000 in investments and $1,250,000 in the form of a long-term loan. $1,573,000 is immediately spent leaving $677,000. If he has no customers, he can afford to remain open for 3 months. As well, they are not attractive to individuals who seek to use the Internet for longer periods of time and the customer base that they are attempting to attract is the more affluent and educated of the population. They are also the most likely to either already own a computer or will be purchasing a computer in the near future. Mr. Grant must have a business plan that is either for the short-term or able to readily adapt to future circumstances as he expects private usage to increase in 3 years. Mr. Grant should also examine factors external to his business. These issues include his mention of the relatively low demand for coffee in Jamaica as well as changes in levels of private Internet usage. His management plan should include contingencies to replace coffee if it is not making a profit as well as plans for the computer area when future demands for Internet café’s start to decrease. A final issue that Mr. Grant should also examine is the terms of agreement for the long-term loan. If CIC is very profitable they may want to pay off the loan as quickly as possible instead of incurring unnecessary interest.

2. The fixed costs remain constant within a relative range of finished products produced. The fixed costs amount to an annual rate of $2,479,400 and the break down of each fixed cost is shown in Appendix 1. The fixed costs include the manager, employees, rent, telephone and utilities, link to Internet, insurance, advertising, interest on loan and miscellaneous administration and maintenance fees. The start up costs amount to a one-time fee of $1,573,000 and the breakdown of each cost is shown in Appendix 2. It should be noted that in all cases start-up costs were amortized in the first year. The variable costs are those that are accrued on a per customer basis and are shown in Appendix 3. This amounts to a weighted average Variable Cost of $104 per customer.

3. The costs of the first customer may be calculated by adding the fixed costs, start-up costs and variable costs for the first customer. The variable cost was calculated using a weighted average of based on the estimated usage of the Internet. Assuming that the fixed costs are calculated on an annual basis and are set for the entire year then the cost for the first customer will be $4,052,504.

4. The contribution margin may be calculated for each customer as: C/M = R – VC. A weighted average was used because it is estimated that 40% of the customers will use the computer thereby increasing variable profit by $60 ($120 revenue, $60 variable cost). A breakdown of the variable costs and revenue are shown in Appendix 4. The contribution margin is $144 per customer.

5. In order for the CIC to break even they must cover their fixed costs, variable costs and start-up costs. This can be solved using the formula: B/E Pt. = (Fixed cost + Start-up cost) / contribution margin B/E Pt. = (2479400 + 1,573,000) / 144

B/E Pt. = 28,142
Therefore, they will need to have 28,142 customers that at minimum meet their average consumption expectations of computer usage, food and beverages in order to reach their break even point in the first year.

6. Using the same formula as question 5, except that there are no longer any start-up costs but fixed costs ($2479400) and contribution margin ($144) remain the same so Mr. Grant will require 17,219 customers in order to reach his break-even point for the second year.

7. Based on the projected given to him we can calculated the expected...
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