Pre-Text *All numbers are based in Jamaican currency. * All numbers are rounded to the nearest dollar. 1 . What managerial issues should David consider before starting the ICC? Before starting the ICC David should consider the following managerial issues: 1 . He has minimal training in business ownership. He has the background of a computer programmer, and is getting his MBA but he is still in the process of learning and doesn’t have the knowledge to start an internet cafeГ©. 2.
David is also planning to hire a manager with Jamaican restaurant experience to elf him with the majority of his business activities; this could be an issue as he hasn’t found anyone yet. He isn’t considering the possibility that he will not be able to find someone to fill the position. 3. David also seems to have little business knowledge when it comes to pricing. He examined the market and found that the industry price was $90 per hour for internet service and that cost was considered high, yet he decided to add 30% to this number to charge at his own internet cafeГ©.
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It is poor business sense to price his service that much higher than the already expensive prices currently in the industry. . Define the fixed, variable and start-up costs in this case. Fixed costs are: $ 480,000 – Manager Salary $ 374,000 – Wages $360,000 – Building lease $ 120,000 – Internet lease $120,000 – Contents Insurance – Advertising $600,000 – Administration & Maintenance $ 125,000 – Interest on loan* Total Fixed costs *Interest on loan calculated at 10% per annum as we weren’t given an amortization period.
Variable costs are: $60 per computer hour – Internet Service $30 per person – Cost of Food $140 Total Variable Cost per customer Start-up Costs are: $20,000 – Advertising prior to Opening 120,000 – Legal Fees etc prior to Opening $7000 – Utilities Deposit (one time payment) – Equipment, Furniture etc Prior to Opening Total start-up costs 3. What will be the costs for the very first customer? 4. What is the contribution margin per customer?
In order to calculate contribution margin per customer, I used the worst case- scenario provided by the market research firm assuming 30% of the 20,000 person market segment would visit the cafeГ© 2 times per year. Furthermore, that 40% of these customers would use the internet and all of the customers would buy food and drinks. Total Revenue Based on the above assumptions, I concluded : (20,000 (target market) x 30%) X 2 = 12,000 visits eating and drinking. Of these 12,000 visits, 40% would use the internet service, so = 4,800 computer users.
Thus: $576,000 – 12,000 visits x $200 (sales per person (food and drink)) – 4800 computer users x $60 (Sales per internet hour) $2,976,000 – Total Revenue Variable Costs $960,000 – 12,000 x $80 (cost of food and drink per person) $288,000 – 4800 x $60 ( Cost of internet per person) – Total bankable costs Total Revenue – Total Variable Costs = Total Contribution Margin $2,976,000 – To determine contribution margin per unit I used, 1,728,000 / 12,000 = $144 per visit.
This is based on the average contribution margin, as some customers will eat, drink and use the internet and some customers will Just use the internet. 5. How many customer visits will ICC need in order to break-even in the first year? In order to determine the break-even point for ICC in year 1, I used the previously determined average contribution margin per customer – $144. 00. Total Fixed Expenses / Contribution Margin per Customer (Fixed costs) + $1 (Start-up costs) / $144 = 26, 888 customer visits.
In order to break-even in the first year ICC will need to have 26,888 customer visits. 6. How many customer visits will ICC need in order for it to break-even in year two? Total Fixed Expenses / Contribution Margin Per Customer (Fixed costs) / $144 = 15,966 customer visits. In order to break-even in the first year ICC will need to have 15,966 customer visits. I made the assumption that year two will still have minimal sales based on the industry, Chic’s pricing in comparison to his competitors, where he is locating his business et cetera.