Café Xaragua (The Calgary opportunity) Harvard Case Solution & Analysis

Financial Statements Analysis:

            These finances are made from the best possible information available from the market research. The financial statements are prepared from the combination of financial information available and estimations of market research.

            It was under estimation that there can be 200 and 300 numbers of customers per day and an average of 250 customers per day were taken to proceed for the revenue recognition from those customers.Another estimation in revenues is the revenue mix in that it is estimated that 50% of the customers would buy regular drip coffee and remaining 50% would enjoy specialty drinks. From the customer mix, 50% of the customers would also buy baked products. There would be around 10% customers who would buy the coffee beans for home.

            The Financial shave shown that the revenues from the operations of the Café Xaragua is $584,000, and the contribution of regular drip coffee is 23.4%, 31.25% of specialty drinks, 19.5% of baked goods, and 25.8% from bags of coffee (appendix 1).

            The cost of sales has also taken many of the assumptions and estimations. The cost of sales for every item is different and the cost of regular drip coffee and specialty is 20% of the sales price, baked goods cost $1.25 per item that represents 50% of sales, and bags of coffee represents a 40 % cost of sales.

            The cost of sales is amounting to $181,131 for the first year of operation.The cost of the sales mix contribution by individual item is: 15.11% of regular drip coffee, 20.15% of specialty drinks, 31.49% of baked goods, and 33.25% from bags of coffee.

            The cost of sales’ burden of coffee bags and baked goods is high as compared to the sales mix; the reason for such burden is due to the higher percentage of cost of sales as compared to served coffees.

            The gross profit of the café is very impressive as it has 69% gross profit margin from its product sales. The profit margins are high, but not the net profits that represent 0.45% of the revenues. The reason behind such change is the operating and financial expenses that are very high.

            The expense represents 68.5% of the total revenues and amounting $400,224. The expenses are very high from these expenses some of the items are occurring once in this year and those are not recurring. The detailed explanation of these expenses is given below.

            The first item in the expenses is staff wages amounting to $209,664 that represents 52.39% of total expenses and 57% of operating expense. The wages are very high and it represents above 70% from that minimum wage rate in Alberta. The wagerates, rate is too high and the owners should think of wages rates before proceed as the staff can be available at a 20 % premium.

            The salary ofa part time manager is $25,000 for the current year. It represents 4.28% of sales and 6.25% of the total cost. The figure will increase to $60,000 in the next year because the manager is on part time training for next year he will join as a permanent manager with a gross salary of $60,000 per annum.The increment must be reasonable because the increment is above 150% of his current salary. The market average must be considered while increment in the salary of the manager.

Café Xaragua Case Solution

            The rental expense is $70,695 that represents 12.11% of sales and 17.66% of total expenses. The rent will remain same for the next four years because there is a rental agreement for 5 years. The rent is based on $45 per square feet, and the café is about 1,571 square feet.

            The utility expense is $23,565 that represents 4% of revenue and 5.89% of total expense. The expense is also based on square feet and it costs $15 per square feet.

            Phone and internet expense is $3,600 that is acceptable and it will be same for the next years.

            The marketing expense is $22,000 this year and from this marketing $12,000 is related to the current year expense and $10,000 is one-time expenditure for the initial start of business. The expenditure of $10,000 will not occur in the future as because it is one-time expenditure.

            There is an expense of loan of interest that is $32,500 and it represents 5.6% of revenues and 8.1% of total expenses................

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