cafe yumm

Topics: Costs, Renting, Variable cost Pages: 5 (1192 words) Published: December 4, 2013
Case # 1: Franchise with Café Yumm!
Decision Analysis
Due: Wednesday, Oct. 23
Requirements:
(1) Only one copy of solutions is required for each team
(2) Email an e-copy of the write-up and the EXCEL analysis sheet(s) to the instructor before class on Oct. 23 AND hand in a hard copy of the write-up at the beginning of class on Oct. 23 (3) List your assumptions you used in your analysis (if there are any) (4) The write-up must be typed with the necessary supporting figures and tables (5) Late solutions will not be accepted

This note is developed solely as the basis for case study and class discussion. It is not intended to serve as sources of primary data or illustrations of effective or ineffective management . Let’s assume that it is currently October of 2011 and you are exploring the opportunity of becoming a Café Yumm! franchisee by opening a Café Yumm! near the UO campus on E13th street. Alternatively, you can open a Café Yumm! in downtown (two blocks from the LDT). For the downtown location, you face the following uncertainty: the city plans to build a huge office and apartment complex (with estimated 100,000 square feet office space and 150 apartments). The city will vote to make final decision in a year from today. If the project is approved by the city, the construction will take a year (starts this month next year and ends a year after that). You estimate the probability of the approval of the project by the city is 75%. To evaluate the franchise opportunity with Café Yumm!, you start to collect info as below. For both the UO and the downtown locations, you have the following estimates of the expenses to become a part of the Café Yumm!:





Franchise fee: $35,000. This is one-time charge, paid to Café Yumm!. Advertising costs: between 1% and 2% of the gross sales paid to Café Yumm! on annually basis; currently 1.5% of the gross sales. You will pay the advertising cost by the end of each year. Service fee: 6% of the gross sales paid to Café Yumm! by the end of each year.

For the UO location, you estimate that the initial investment is $350,000. That includes the remodeling cost and the first-year rent which is $6,000 per month for this 1,200 square feet restaurant space. The lease of the restaurant space will be guaranteed for the next seven years. The rent, however, is expected to vary every year. The rent will be paid by the end of each year.

From the opportunity analysis, your estimate other expenses and sales for the UO location are as follows: Expenses and Sales
Labor Cost
Non-labor Fixed Cost (Equipment lease, utility,
insurance, and other miscellaneous costs)
Cost of Food & Service
Sales

Per Year
$250,000
$36,000
$185,000
$1,000,000

For the downtown location, you have the following choice depending on if the city approves the construction of the new office and apartment complex:
Choice A: Rent a 1,500 square feet facility now






The initial investment: $500,000. That includes the remodeling cost and the first-year rent which is $15,000 per month for this 1,500 square feet restaurant space. The lease of the restaurant space will be a seven-year agreement (early termination and sub-rental are not allowed). The rent, however, is expected to increase to $20,000 per month after the new office and apartment complex is built (if the project is approved). The rent will be paid by the end of each year. Estimated labor cost, cost of food and service, and sales: the same as those of the UO location before the new office and apartment complex is built; two times of those of the UO location after the new office and apartment complex is built (assume that if the new complex is not built, the estimated numbers will remain unchanged).

Estimated non-labor fixed costs: $4,500 per month. The number will increase to $6,500 after the new complex is built.

Choice B: First rent a 1,000 square feet facility now; if the new office and apartment complex is approved by the city, you...
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