Question

CASE SYNOPSIS

Sweet Treats is a small, local bakery owned and operated by cake designer, Riley. Sweet Treats serves cakes, cupcakes, house-made ice cream, coffee and an assortment of baked goods as well as custom ordered cakes for special occasions. Riley opened her store front in 2014 but is searching for ways to grow her business. After hiring a consultant and using information from this as well as information based on a market study, Riley made the decision to open a food truck it the local community and to focus on two products. Riley needs a cost-volume-profit analysis to support her decision for a food truck.

CASE BODY

Sweet Treats is located in a rural part of southeastern United States in a town with a population of approximately 20,000. There is also a university located down the street from Sweet Treats but not within walking distance. The three largest employers in town are a Tribal Nation, a large regional bank and their corporate headquarters and a distribution center for a well-known retailer. In addition, the Tribal Nation has a large independent construction company located on site that will be there for approximately three years. A food truck area has recently opened in town and currently does not have dessert or coffee selections. There is a larger town within 20 miles that has just opened a food truck park, as well.

Riley’s passion is business and her niche is her bakery. Riley would like to do more managing and less baking and therefore is looking for a way to train employees to create products that will continue to build her business but not tie her to the kitchen working on customized cakes. Cupcakes and coffee are both very popular due to the millennial’s desire for customization and “grab and go” options. Popular television shows like Cupcake Wars, Two Broke Girls and Fixer Upper highlight cupcakes and result in a trend for this market.

A recent consultation resulted in the recommendation that Riley open a food truck with her two most popular products – cupcakes and coffee. She knows the market price for cupcakes and coffee but needs to know if and how much her profit will be if she follows the advice of her consultant. Riley currently has $5,000 of retained earnings from the bakery to invest in this venture but will need to borrow the additional capital at an annual rate of 4.5% through a small business initiative in her state of residence.

Riley’s current employees can make the cupcakes at her shop but she needs to hire someone to run the food truck and work as a barista in the food truck. She thinks she can move from location to location and operate Monday-Saturday from 6:00 a.m. to 3:00 p.m. with just two workers at a time in the truck.

Breakeven is calculated for a product mix with use of total fixed costs and contribution margin for each item. You will need to do some market research to set a sales price for cupcakes and coffee.

CASE STUDY QUESTION

1. What costs should Riley consider for her food truck venture? What costs are fixed? What costs are variable? Estimate each cost.

Answer 1

Since food trucks are essentially micro-restaurants on wheels, you might assume that launching a food truck business is going to cost you only a fraction of that of a traditional brick-and-mortar full-service restaurant. To a certain extent, you’re correct. But that doesn’t mean that rolling down Main Street for lunch hour in your new set of shiny wheels is going to be cheap.

Various costs which we did not consider during the planning stage of business will also be incurred in the process.

First of all, let us see the nature of overall costs,

1) Wages of two full-time workers on the food truck

2) Additional wages to coffee makers

3) Interest cost on additional borrowing i.e cost of capital

4) Fuel cost for truck

5) Maintainance cost

6) Cost of food supplies

7) Insurance cost for food truck

   8) Licence, permits and certification cost

9) Advertisement and Marketing cost

10) depreciation on the truck (a non-cash expense)

As per the requirement of the question let us divide these costs into fixed cost and variable cost.

• Fixed cost-: Cost which does not change with the volume of production.
• Variable Cost-: Cost which varies with the volume of production.

Fixed costs	Variable costs
Interest cost on additional borrowing i.e cost of capital,	Cost of food supplies
	Additional wages to coffee makers
Wages of two full-time workers on the food truck,
Fuel cost for truck
depreciation on the truck (a non-cash expense)
Licence, permits and certification cost
Insurance cost for food truck.
Maintainance cost