VINCENTS CAPPUCCINO

EXPRESS
Jessica Walter, Lucas Mailey, Reuben Gan
Background details
Three years ago, Vincent Chow completed his degree in accounting.
The economy was in a depressed state at that time, and Vincent
managed to get an offer of only $30,000 per year as a bookkeeper. In
addition to its relatively low pay, this job had limited advancement
potential.
Since Vincent was an enterprising and ambitious young man, he
declined this offer and started a business of his own. He was convinced
that because of changing lifestyles, a drive-through coffee
establishment would be profitable. He was able to obtain backing from
his parents to open such an establishment close to the industrial park
area in town. Vincent named his business The Cappuccino Express
and decided to sell only two types of coffee: cappuccino and
decaffeinated.
As Vincent had expected, The Cappuccino Express was very well
received. Within three years, Vincent had added another outlet north of
town. He left the day-to-day management of each site to a manager
and focused his own attention on overseeing the entire enterprise. He
also hired an assistant to do the record keeping and selected other
chores.

1. What factors can be expected to have a major impact on the
success of The Cappuccino Express? Which success factors can
be influenced by Vincent himself and why?

Location Affects number of potential customers
Price per cup Affects demand for coffee
Cost of beans Affects costs
Competition Affects number of potential customers
Rent Affects costs
Equipment cost Affects costs
Serving capacity Affects revenue
Wage costs Affects costs
2. What major tasks does Vincent have to undertake in managing
The Cappuccino Express? Can he do all tasks by himself?

Deciding whether he should stay in business (that is, whether
the business is sufficiently profitable)
Analyzing each site to make sure that it continues to be
profitable
Examining new sites or expansions to current sites
Pricing
Deciding on the amount and types of promotions
Ensuring employee efficiency
Maintaining service and product quality

He should delegate some of these tasks to each of his site
managers Ensuring employee efficiency & Maintaining service
and product quality.

Monitoring & Motivating site managers
3. What are the major costs of operating The Cappuccino
Express? How might the figures be different from the expenses
as reported in the financial statements?

a) Vincent's assistant's salary
b) Vincents forgone salary
c) Business license for each site
d) Insurance for each site
e) Employee wages at each site
f) Promotion/advertising
g) Equipment cost at each site
h) Utilities at each site
i) Cost of coffee beans
j) Cost of supplies

There are monetary costs which typically are excluded from
financial accounting records, but are nevertheless relevant to
management decision-making, such as Vincent's forgone salary.
4. Vincent would like to monitor the performance of each site manager.
Profitability is one measure he could use but what might cause a problem
here? Do you think alternative performance measures such as employee
turnover, service and product quality, and customer satisfaction would
reflect managers performance more accurately?

Using profitability as a measure you have to consider the need to
differentiate between the performance of the site and that of its
manager. Profitability can be a biased measure for performance.
High turnover among the hourly employees may imply higher hiring
costs and worse service due to disgruntled or inexperienced
employees. To measure customer satisfaction, he could conduct
surveys or give out discount coupons for repeat purchases.
Accounting numbers often lag other measures in reflecting some
aspects of operating conditions. While customer dissatisfaction and
high employee turnover will reduce profits, the periodic profit
measures may not reveal this downward trend until it is too late for
corrective action.
Accounting data also only captures a subset of the information
needed for effective management. It is important to collect and
consider non-financial data, some of which are not easily quantified.
5. Looking at the performance measures suggested in (4), which
of these should Vincent select if he could use only one? (think
about what information would be useful)

Profitability is the measure that should be chosen
The other measures; employee turnover, service and product
quality and customer satisfaction dont address the managers
overall performance
Since profit= Revenues Expenses it is possible to determine
the profitability of both sites. Revenues are easy to distinguish,
however costs are more difficult (joint admin costs, cost of
Vincents time and effort to manage both)
It is important to evaluate the managers influence and the
influence of the site itself. This means that locational factors
must be taken into account as well as ease of access to stock
and if any costs are different for the original site or the north
site.
If possible any costs that may be shown as a total expense for
the company need to be separated by store (advertising,
Vincents salary, Admin costs)

6. Suppose that last year, the original site had yielded total
revenues of $146,000, total costs of $120, 000, hence a profit of
$26,000. Also assume that Vincent had judged this profit level to
be satisfactory. For the coming year, Vincent expects that due to
factors like increased name recognition and demographic
changes, the total revenues of this site will increase by 20 percent
to $175,200.

i) What amount of profit should he expect from the site?

Profit from the site will increase
Profit will increase due to revenues rising from $146,000 to
$120,000 while costs should not rise by this much.
Certain fixed costs will remain the same
Other costs will increase due to a greater level of output from
the site resulting in greater expenses such as operating costs
and COGS.

6 ii) What actions can a site manager take to increase his/her site's
profitability?
To maximise profits costs need to be reduced.
As revenue has already increased due to more customers cost
minimisation would be more effective than targeting revenue
increase
As many revenue increasing tasks bear costs (advertising,
more staff) it is hard to evaluate their effectiveness when
revenue is already predicted to increase
Cost minimisation options include reducing rent costs (possible
relocation), or attempting to lower COGS (supplier bargaining
or change of suppliers).
The manager must also evaluate his current workplace.
Monitoring and evaluation of employees may boost
productivity. If new staff are recruited investment in better
trained and more efficient staff may be an option (probation
period or orientation/trial for job)