Question

Giggles Comedy Emporium provides entertainment for birthday parties. Over the last year, Giggles has entertained at over 150 birthday parties. Giggles’ business is booming! The company has parties booked solid for the next six months. Customers generally must book 6-8 months in advance to secure a spot. Mark Spear, the owner of Giggles Comedy Emporium, however, is worried. His business is busy, his customers are extremely happy, his employees are happy, but he is barely breaking even. He cannot understand, with his business being so successful, why he is barely able to pay himself a wage. Mark has asked you to help him figure out what he is doing wrong.

The services provided at each party vary. Some customers only want a clown to perform and they handle the other party details themselves. Other customers want a full package – food, cake, entertainment, cleanup, party favours, decorations, and costumes for the kids. Mark has identified the following services that can be provided at a party.

• Clown: most, if not all, parties include a clown who performs for one hour at the party. Mark pays the clown $40 for each party.
• Food (excluding cake): when customers order food for their party through Giggles, Mark outsources this service to Carl’s Catering. Carl charges an average of $12 per child for food.
• Cake: Mark orders birthday cakes through his sister, Sarah, who has a small bakery and makes custom cakes for Giggles. Her smallest cake is 8” (which will serve up to 10 kids) and costs $40. She also makes a 10” cake for $60 (which serves 20 kids).
• Cleanup: Giggles also provides cleanup service. Cleaning staff are paid $15 per hour. Cleanup averages 2 hours per 20 kids.
• Party favours: Party favours can also be ordered through Giggles. These cost $5 per bag to assemble.
• Decorations: Giggles will also fully decorate a party. Decorating staff are paid $15 per hour and take one hour to decorate a party for 20 kids. Decorations cost an average of $50 for party of 20 kids.
• Costumes: Giggles also provides costumes for parties so the kids can dress up in a theme. On average, costumes cost $40 each and can be worn 25 times before needed to be replaced. Costumes are cleaned after every party at a cost of $5 each.  

Mark has set up a fee schedule for each service as follows:

Service	Fee charged to customer
Clown	$60 per party
Food	$15 per child
Cake	$2 per child
Clean up	$2 per child
Party favors	$6 per child
Decorations	$2 per child
Costumes	$6 per child

During the two weeks, Mark catered 6 parties. Some details of the parties are shown below:

Customer	1	2	3	4	5	6
# of kids attended	20	25	45	15	5	12
Clown	Y	Y	Y	Y	N	Y
Food services	Y	Y	N	N	Y	N
Cake	Y	N	N	Y	Y	N
Clean up	Y	Y	N	N	Y	N
Party favors	Y	Y	N	N	Y	N
Decorations	Y	Y	Y	N	Y	N
Costumes	N	N	Y	N	Y	N

REQUIRED:

1. Calculate the customer-level operating income for each customer by preparing a customer profitability analysis. Rank the customers according to profitability. (15 marks)
   
2. Mark would like to earn a return of 50% on costs. What price should he have charged per child for each customer to earn a 50% return on costs? How does this compare the original fee he charged per child? What are the main reasons for this variance? Do you have any suggestions on how Mark could adjust his fee schedule? (10 marks)

Answer 1