Case study: Cupid Computer Dating Agency

Jim Baker, a young graduate, with business and computer degree, decided to start up a
dating agency business. Jim had developed a computer program that could match
couples with similar interests based on the information entered. Jim aims to develop a
website where individuals can join the dating club. He proposes to provide free mem-
bership for the first week and a membership fee of £60 for every six months if they wish
to continue the membership..

Jim believes that he requires at least £30,000 to start this business venture. Jim had
saved up £10,000 from gifts from relatives and vacation earnings. His mother agreed to
be a silent partner in the business and agreed to advance £20,000 to his dating agency
business on 1 April 2012. In return Jim agreed repay 10 instalments (i.e. September and
March each year) to his mother. He also agreed to pay his mother interest at 10%p.a. on
each instalment on the balance outstanding just before the instalment payment.

He estimates his expenses to be as follows:

• Computer and ancillaries for £25,000 to be purchased in April for cash. He es-
timates its useful life at five years and the residual value at the end of the 5 years
to be £2,500.
• As this is a start up business, he plans to spend £10,000 in advertisements and
the promotion of his new business in the first 3 months. The payments are made
evenly in May, June and July.
• His other yearly overhead costs (excluding expenses separately identified be-
low) were £30,000 and payments are made evenly in the month following when
it is incurred.

Jim wishes to start his business on 1 April 2012. Based on his research, Jim aiming for
2,000 new paying members to enrol in the first year but if he was prudent, he is confident
of at least 1,200 new paying members. Assume that the paying members enrol evenly
throughout the year.

As part of the promotional activities, Jim plans to organise a speed-date night at a local

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pub in July. Although the pub can cater for 150 individuals, he believes that 100 indi-
viduals should attend a speed-date. He plans to charge a non-refundable fee of £50 per
person. His understands that the Pub charges £10 per person for the meal and £1,500
for the venue and he estimates the advertising and other costs to be £1,000 for this
event. The tickets, which are non-refundable, go on sale in June and the payments must
be made by end of June. Jim has to make a £500 nonrefundable deposit with the pub by
the end of May. Jim has to re-confirm the booking in the first week in July and pay a
further £500 non-refundable deposit. The balance of the expenses is due for payment in
July.

As Jim does not have any other income, he requires £1,000 per month to cover his living
expenses.

Questions
1. In relation to the promotional activity to be held in July:
a. How many individuals have to attend in order for Jim to break even for
this activity?

b. Calculate the profit or loss for the event based on Jim's estimate.

2. Prepare the full loan repayment schedule for the loan received from Jim's
mother.

3. Prepare a cash budget statement for the six month ended 30 September based
on Jim’s prudent estimates.

4. Prepare a short note to Jim commenting on the cash budget statement. What
action(s) if any you would recommend to Jim based on your findings.

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Questions
1. In relation to the promotional activity to be held in July:
a. How many individuals have to attend in order for Jim to break even for
this activity?
Answer:
Venue($) Advertising & other Total($)
costs($)
Fix cost 1,500 1,000 2,500
Meal
Variable cost 10

Contribution Margin = Unit fee - Variable cost

= $50 - $10
= $40
∴BEP Sales units = Total Fix cost / Contribution Margin
= $2,500 / $40 = 62.5 ≈ 63
BEP Sales = BEP Sales units x unit fee
= 62.5 x $50 = $3,125
The break even point for this activity is 63 persons.

b. Calculate the profit or loss for the event based on Jim's estimate.
Answer:
Profit or loss = (Total sales units - BEP sales units) x Contribution Margin
= (100-62.5) x $40=37.5 x $40
=$1,500

2. Prepare the full loan repayment schedule for the loan received from Jim's
mother.
Answer:

Interest($) Principal($) Total($)

First payment(Sep 20,000x5%=1,000 2,000 3,000
2012)

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Second pay- 18,000x5%=900 2,000 2,900
ment(Mar 2013)
Third payment(Sep 16,000x5%=800 2,000 2,800
2013)
Fourth pay- 14,000x5%=700 2,000 2,700
ment(Mar 2014)
Fifth payment(Sep 12,000x5%=600 2,000 2,600
2014)
Sixth payment(Mar 10,000x5%=500 2,000 2,500
2015)
Seventh pay- 8,000x5%=400 2,000 2,400
ment(Sep 2015)
Eighth pay- 6,000x5%=300 2,000 2,300
ment(Mar 2016)
Ninth payment(Sep 4,000x5%=200 2,000 2,200
2016)
Tenth payment(Mar 2,000x5%=100 2,000 2,100
2017)
Total payment 5,500 20,000 25,500

Working for Q2
Principal installment= total loan / installment of payment = $20,000 / 10 = $2,000
Monthly interest = 10% / 12
Every installment payment interest = Principal left x 6months x Monthly interest
= Principal left x 6 x 10% / 12
= Principal left x 5%

3. Prepare a cash budget statement for the six month ended 30 September based
on Jim’s prudent estimates.
Answer:

Cash budget statement on Jim’s prudent estimates for the six months
ended 30 September 2012 (all figures in $)
April May June July August September

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Cash from opera-
tions
Membership fee 6,000 6,000 6,000 6,000 6,000 6,000
earning1
Advertise expense2 - (3,333.34) (3,333.33) (3,333.33) - -
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overhead costs (2,500) (2,500) (2,500) (2,500) (2,500) (2,500)
Living expense (1,000) (1,000) (1,000) (1,000) (1,000) (1,000)
Promotional activi- - (500) - (3,000) - -
ties expense4
Promotional activi- - - 5,000 - - -
ties earning
Net cash from op-
erations 2,500 (1,333.34) 4,166.67 (3,833.33) 2,500 2,500
Cash from investing
Equipment (25,000) - - - - -
Net cash from in- (25,000) - - - - -
vesting
Cash from financing
Self-saving 10,000 - - - - -
Loan from mother 20,000 - - - - -
Loan repayment5 - - - - - (3,000)
Net cash from fi- 30,000 - - - - (3,000)
nancing
Net increase in 7,500 (1,333.34) 4,166.67 (3,833.33) 2,500 (500)
cash6
Opening balance - 7,500 6,166.66 10,333.33 6,500 9,000
Net cash for
7,500 6,166.66 10,333.33 6,500 9,000 8,500
month ended

$1,200
1 Monthly membership fee earning = 12months × 60 = $6,000
$10,000
2 Advertise expense = = $3,333.33
3months
$30,000
3 Overhead costs = 12months
= $2,500
4 Refer to the payment due date of promotional activities expense.
5 Refer to the answer for Q2.

6 Net increase in cash=Net cash from operations+Net cash from investing+Net cash

from financing

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4. Prepare a short note to Jim commenting on the cash budget statement. What
action(s) if any you would recommend to Jim based on your findings.

Note to Jim:

After researching on the cash budget statement, we found some issues to your star-up
business. So we list below for your information.

We found that the ratio of operation cash/net increase in cash is reasonable for your
start-up business, the ratio nearly remains 1 or more (see Figure 1). And from Figure 2,
we can also find your business is a typical newly established firm, financing cash and
investing cash are both high in the beginning, but low down afterwards. The net cash for
month ended (see Figure 3) remains mean lever. We can conclude that the business
development level for your business is steady, which means your business has no ob-
vious growth in few months.

All in all, we suggest you to introduce more capital during the business growing up
stages, and invest more money on marketing and R&D, that may achieve higher busi-
ness growth and lead to a higher market share in a short period. To avoid shortage of
funds, you also need to aware the cash flow and decide to buy or rent new equipment in
the future.

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Appendix:

Ratio of operation cash/net increase in cash 0.333333333 1 1 1 1 -5

ratio of operation cash/net

increase in cash
5

0
April May June July August September
-5

-10
Figure 1

Net increase in cash Net cash from operations

Net cash from investing Net cash from financing
40000

30000

20000

10000

0
April May June July August September
-10000

-20000

-30000

Figure 2

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 Net cash for month ended
12000
10000
8000
6000
4000
2000
0

Figure 3