BUS 5433 – Spring 2015 CASE II

Assume that you are considering leaving your job as a professional mime and opening a milkshake shack on the beach of a resort on the “big Island” of Hawaii. A unique feature of your milkshakes is that you will serve them with flavored straws that match the flavor of the chosen milkshakes by customers. Your research results in the following estimates and actual costs:

Sales prices of milkshakes ($7.00 for small, and $10.00 for large)

Cost of materials needed to make milkshakes:

DIRECT MATERIAL INGREDIENTS

Small (8 oz. size) Large (12 oz. size)

Whole Milk ($15 for a 5 gallon=740 oz.) (need 2 oz. of milk) (need 3 oz. of milk) Cream ($20 for 1 gallon=128 oz.) (need 2 oz. of cream) (need 3 oz. of cream) Sugar ($10 for a 15 lb. bag=30 cups) (need ½ cup of sugar) (need ¾ cup of sugar) Premium Vanilla Ice Cream ($24 for 600 oz.) (need 6 oz.) (need 9 oz. of cream) Flavorings .25 per shake .40 per shake Flavored specialty straws .75 per straw .75 per straw

Cups (500 8 oz. cups @ a cost of $200)

Cups (500 12 oz. cups @ a cost of $250)

Fixed costs:

 Shack rental: $500 a month

 Cleaning and other miscellaneous supplies: $100 a month

 Equipment: Industrial Milk Shake Maker: $72 per machine x 10 machines=$720

 Equipment: Industrial Refrigerator/freezer: $480

 Countertops: $1,200

 Tables and benches for customers to sit outside: $108 per bench-set x 10=$1,080

 Annual insurance: $600 a year

 Sign: use your marketing knowledge to think of a good name= $100

You borrow money from your Dad for these fixed costs. You have to pay him $225 per month for two years. Each month’s payment is $199 principal and $26 interest.

You plan to hire two part-time employees, with each receiving a monthly salary of $800 per month (including all taxes and benefits).

REQUIREMENTS.

1) Using the above information, determine the number of milkshakes you will need to sell to break even. In order to do this, you will need to set a sales price as well as classify the above costs into fixed or variable. (Hint One: Keep all costs on either a weekly, monthly or yearly basis throughout your analysis). (Hint two: Remember that this is a multi-product breakeven problem.)

2) Now build-in a salary for yourself, and determine the new number amount of milkshakes you will need to sell to break even.

3) Given you earn $36,000 per year in your mime position, should you leave your job to open the milkshake shack?