VINCENT’S CAPPUCCINO EXPRESS

Jessica Walter, Lucas Mailey, Reuben Gan

Background detailsThree years ago, Vincent Chow completed his degree in accounting. The economy was in a depressed state at that time, and Vincent managed to get an offer of only $30,000 per year as a bookkeeper. In addition to its relatively low pay, this job had limited advancement potential. Since Vincent was an enterprising and ambitious young man, he declined this offer and started a business of his own. He was convinced that because of changing lifestyles, a drive-through coffee establishment would be profitable. He was able to obtain backing from his parents to open such an establishment close to the industrial park area in town. Vincent named his business “The Cappuccino Express” and decided to sell only two types of coffee: cappuccino and decaffeinated. As Vincent had expected, “The Cappuccino Express” was very well received. Within three years, Vincent had added another outlet north of town. He left the day-to-day management of each site to a manager and focused his own attention on overseeing the entire enterprise. He also hired an assistant to do the record keeping and selected other chores.

1. What factors can be expected to have a major impact on the success of The Cappuccino Express? Which success factors can be influenced by Vincent himself and why? • Location – Affects number of potential customers• Price per cup – Affects demand for coffee• Cost of beans – Affects costs• Competition – Affects number of potential customers• Rent – Affects costs• Equipment cost – Affects costs• Serving capacity – Affects revenue• Wage costs – Affects costs

2. What major tasks does Vincent have to undertake in managing The Cappuccino Express? Can he do all tasks by himself?

• Deciding whether he should stay in business (that is, whether the business is sufficiently profitable)

• Analyzing each site to make sure that it continues to be profitable• Examining new sites or expansions to current sites • Pricing• Deciding on the amount and types of promotions• Ensuring employee efficiency• Maintaining service and product quality

He should delegate some of these tasks to each of his site managers – Ensuring employee efficiency & Maintaining service and product quality.

• Monitoring & Motivating site managers

3. What are the major costs of operating “The Cappuccino Express”? How might the figures be different from the expenses as reported in the financial statements?

a)      Vincent's assistant's salaryb)      Vincent’s forgone salaryc)      Business license for each sited)      Insurance for each sitee)      Employee wages at each sitef)       Promotion/advertisingg)      Equipment cost at each siteh)      Utilities at each sitei)       Cost of coffee beansj)       Cost of supplies

There are monetary costs which typically are excluded from financial accounting records, but are nevertheless relevant to management decision-making, such as Vincent's forgone salary.

4. Vincent would like to monitor the performance of each site manager. Profitability is one measure he could use but what might cause a problem here? Do you think alternative performance measures such as employee turnover, service and product quality, and customer satisfaction would reflect managers’ performance more accurately?• Using profitability as a measure you have to consider the need to

differentiate between the performance of the site and that of its manager. Profitability can be a biased measure for performance.

• High turnover among the hourly employees may imply higher hiring costs and worse service due to disgruntled or inexperienced employees. To measure customer satisfaction, he could conduct surveys or give out discount coupons for repeat purchases.

• Accounting numbers often lag other measures in reflecting some aspects of operating conditions. While customer dissatisfaction and high employee turnover will reduce profits, the periodic profit measures may not reveal this downward trend until it is too late for corrective action.

• Accounting data also only captures a subset of the information needed for effective management. It is important to collect and consider non-financial data, some of which are not easily quantified.

5. Looking at the performance measures suggested in (4), which of these should Vincent select if he could use only one? (think about what information would be useful)

• Profitability is the measure that should be chosen• The other measures; employee turnover, service and product quality

and customer satisfaction don’t address the managers overall performance

• Since profit= Revenues – Expenses it is possible to determine the profitability of both sites. Revenues are easy to distinguish, however costs are more difficult (joint admin costs, cost of Vincent’s time and effort to manage both)

• It is important to evaluate the manager’s influence and the influence of the site itself. This means that locational factors must be taken into account as well as ease of access to stock and if any costs are different for the original site or the north site.

• If possible any costs that may be shown as a total expense for the company need to be separated by store (advertising, Vincent’s salary, Admin costs)

6. Suppose that last year, the original site had yielded total revenues of $146,000, total costs of $120, 000, hence a profit of $26,000. Also assume that Vincent had judged this profit level to be satisfactory. For the coming year, Vincent expects that due to factors like increased name recognition and demographic changes, the total revenues of this site will increase by 20 percent to $175,200.

i) What amount of profit should he expect from the site?

• Profit from the site will increase• Profit will increase due to revenues rising from $146,000 to

$120,000 while costs should not rise by this much.• Certain fixed costs will remain the same• Other costs will increase due to a greater level of output from

the site resulting in greater expenses such as operating costs and COGS.

6 ii) What actions can a site manager take to increase his/her site's profitability?

• To maximise profits costs need to be reduced. • As revenue has already increased due to more customers cost

minimisation would be more effective than targeting revenue increase

• As many revenue increasing tasks bear costs (advertising, more staff) it is hard to evaluate their effectiveness when revenue is already predicted to increase

• Cost minimisation options include reducing rent costs (possible relocation), or attempting to lower COGS (supplier bargaining or change of suppliers).

• The manager must also evaluate his current workplace. Monitoring and evaluation of employees may boost productivity. If new staff are recruited investment in better trained and more efficient staff may be an option (probation period or orientation/trial for job)