David Grant is planning to open a first of its kind internet caf, Caribbean Internet Caf (CIC), in his home

town of Kingston,
Jamaica. This caf would offer brewed coffee and other beverages, baked goods sourced from local bakeries, and a unique feature that no
other caf in the city offers, Internet service. David has found a location in the business district of Kingston, and sees the total size of his
target segment at 20,000 people who are between the ages of 18 and 35. He is very knowledgeable about computers but feels that he
cannot run the business on his own. His plan is to employ university students to act as servers and internet tutors, and hire a manager to
run the business on a daily basis. The start up costs are very for a business of this type are very high and it may take awhile before David
begins making a profit. In order to cover the start up costs he looked for a potential investor. An offer was made from his former employer
and Internet provider, JTL, offering $500,000 for a 50% partnership and a $1,250,000 long-term loan with an interest rate of 10% per
annum. The question is whether David should proceed with the CIC venture, and, if so, if it would be a profitable business for him and
JTL. A good way for David to determine whether the CIC venture would be profitable would be to perform a Cost-Volume-Profit
Analysis. The first step is to classify his sales, variable expenses, and fixed expenses. From there he will be able to find his contribution
margin and net income. He has approximately 3 years to make his money back and make a profit because he expects that private internet
usage will increase 3 years after he opens. JTL provided him with three potential usage estimates for the first year of the caf, an
optimistic projection, a realistic projection, and a pessimistic projection. Because the Caribbean Internet Caf is a one of a kind business
in its area and provides a unique feature, internet access, we will use the realistic projection for our calculations. After three years though,
it is most likely the Cafs usage will dip to the pessimistic level as private internet usage increases. David is opening a new business and
must purchase all the equipment he needs. This equipment purchase will be become a sunk cost if the business opens and will make fixed
expenses for the first year very high, after the first year though his fixed expenses will drop dramatically as the equipment was a onetime
purchase. David has also included $20,000 for advertising into his fixed costs for the year. This advertising is very important as it will
introduce the public to the Caribbean Internet Caf and will help increase the sales for the first year. Advertising for a new business is very
important because nobody knows who you are and nobody is looking for you. You must establish a want within the community and have
an advertising campaign that appeals to your target market and draws them in your doors for the first time. Other fixed costs include the
managers salary, insurance, internet, the lease, utilities, internet link, advertising, and regular administrative expenses. A business of this
type also incurs certain variable expenses that are a direct result of sales. A large part of these variable expenses are involved with having
internet access at the facility. These are variable expenses that David plans to cover by charging a 30% premium on the average hourly
rates for internet usage. Considering the Caribbean Internet Caf is one of the few providers of internet, it is likely that it will draw its
realistic number of expected patrons. His other major variable expenses are food and drink, on which he also charges a premium. Sales
numbers were calculated using the expected number of patrons at the realistic level. The three things that will drive the Cafs revenue
are food sales, drink sales, and internet usage. Looking at the realistic level we see 24,000 customers in the first year, spending an average
of 1 hour in the caf, 40% of them paying for a computer, and each one spending $140 on drinks, and $60 on food, per visit. These
numbers give us projected first year sales of $5,952,000.
My recommendation would be that David and JTL continue with this venture but continue cautiously. The Caribbean Internet
Caf may lose money in the first year but that is mainly due to the expenses incurred in purchasing the required equipment to operate the
business. Those costs would be funded by a loan from JTL and would not appear again in the second year. The $20,000 advertising fee
was also a onetime expense. In the second year, sales may increase as the business becomes more established in the community. The caf
must strive to maintain the realistic sales level of 24,000 customers a year if it plans on making a profit. The breakeven point in total sales
dollars is $6,383,103.45 for the first year. This number is larger than the realistic sales projection for year one and is closer to the
optimistic sales projection. This is an ambitious sales number for the first year of a business, meaning it will be hard for the Caribbean
Internet Caf to break even in their first year. Reducing this number is possible but only if fixed expenses can be reduced. The window to
make a large profit is three years, after which private usage will increase and the demand for an Internet Caf will decrease. We are
making the assumption that people will pay $120 instead of the regular $90 to use the internet because of the convenience and comfort the
caf offers as well as avoiding the flat fee internet providers charge. The caf would fill a want for internet usage that professionals and
students in the New Kingston area have. There is also a secondary service provided, food and drink sales. This service would not be found
in other places where the internet is offered and makes for a more relaxing and enjoyable internet using experience. It is most likely that
people who come in to use the internet will end up purchasing food and a drink. The longer this person is on the internet, the better.
Increased internet usage means increased internet revenue along with extra food and drink revenue. It is important that David makes the
internet usage area comfortable, relaxing, and enjoyable. The staffing costs would simply consist of the managers salary, and the students
salary. David would be present with the manager, covering the need for two employees present and the part time students could be brought
in to cover the busy hours while also providing customer service. This customer service and internet tutoring is what would help separate
the Caribbean Internet Caf from other places where internet is available. The caf also offers internet for pleasure use, while corporations
and universities provide it mainly for business use. David will need to accept the offer from JTL on order to purchase the equipment he
needs to get the caf off the ground. JTL will also benefit from the partnership with David. Even if the Caribbean Internet Caf ends up
losing money, JTL will have advertised there service, while also generating sales. In a city like Kingston, Jamaica where the internet is
still growing, it is important to allow people the chance to test out the service and realize how beneficial it would be to them. David must
also design a menu that fits the local cuisine and can compete with the menus of other cafes. If the amount of internet usage is lower than
anticipated in the first year, the price per hour for usage may need to be adjusted. The long-term success of this business does not look
very promising due to the expected growth in personal internet usage. The current success will depend on the sales numbers and ability to
control fixed costs, which at the current time, are very high.

Usage:
Optimistic: 50% x 20,000=10,000 people x 5 times/year= 50,000 visitors per year x 1 hour/ visitor = 50,000 hours
Realistic: 40% x 20,000=8,000 people x 3 times/year= 24,000 visitors per year x 1 hour/visitor = 24,000 hours
Pessimistic: 30% x 20,000=6,000 people x 2 times/year= 12,000 visitors per year x 1 hour/visitor= 12,000 hours

Deatiled Income Statement- Year One

Sales
Internet usage-> $120/h x 1 h/customer = $120 x (40% x 24,000 hours) = $1,152,000
Drinks-> $140/customer x 24,000 customers= $3,360,000
Food-> $60/customer x 24,000 customers= $1,440,000
Total= $5,952,000
Variable Expenses
Internet Usage-> $60/h x (40% x 24,000 hours)= $576,000
Drinks-> $50/customer x 24,000 customers= $1,200,000
Food-> $30/customer x 24,000 customers= $720,000
Total= $2,496,000
Fixed Expenses
Student Wages-> $40/hour x (15hours/week x 52 weeks)= $31,200
Manager salary-> $40,000/month x 12 months= $480,000
Building Lease-> $30,000/month x 12 months= $360,000
Utilities-> $15,000/month x 12 months=$180,000
Internet Link-> $10,000/month x 12 months= $120,000
Insurance-> $10,000/month x 12 months= $120,000
Advertising-> $10,000/month x 12 months= $120,000
Administrative-> $50,000/month x 12 months= $600,000
Initial Advertising-> $20,000
Other Expenses-> $120,000
Interest Expenses-> $125,000
Initial Setup Costs-> $1, 426,000
Total= $3,702,200
Breakeven point in total sales dollars=

Expenses
$ 3,702,200
=
=$6,383,103.45
CM Ratio
0.58

Caribbean Internet Caf

Case Study