Angie’S Empanadas - Angie\'s Empandas case study PDF

Preview

Summary

Angie's Empandas case study...

Description

Angie’s Empanadas Angie is a graduate has decided to start Empanadas and decided to start delivering to the restaurants only. She researched about the product offering and decided about selling Empanadas only, albeit of three options only. They are Vegetable based, Chicken based and beef based. She made a proper budget. She thought that all the products will cost the same and so kept the single price. The resultant success was overwhelming. However, Angie’s failed to consider the different costs of each product type. As a result, she needs an expert to help him because according to her accountant, in spite of his high level of sales, she hired outside experts to help on the issue. 1. Given Angie’s budget and profit goals, suggest which metrics Angie should use to assess the success of her new venture. Prices and costs are per tray, so use trays as the basic unit when determining per-unit amounts.

The matrices that Angie should use in order to gauge and assess the performance of her business venture are operating profit per tray type, contribution margin per tray type and net Profit per tray type and Total Profit by tray type. This is essential because the cost per tray is different and so the profitability per tray is also different. A tray-type is providing better profits whereas others may be covering just the costs. She is selling a tray at the same price irrespective of the cost whereas the costs of each type of tray are different. The costs per tray and Gross margin per tray type is as follows, Vegetaria n Tray type Selling price Production cost Gross Margin

11.5 1.265 12.765

Chicken 11.5 2.3 13.8

Beef 11.5 3.105 14.605

It is evident from the above table that Vegetarian trays have the highest gross margin. However, this information alone will not be sufficient to help Angie decide about which trays she needs to focus on and whether she will be able to meet her profit goals of $4000 per month. She needs a more sensitive analysis for that purpose. She needs to know what total contribution margin per unit each try type provides. This information will provide her knowledge of whether she is selling all tray types on profit. As evident from the Appendix-1, she is selling all tray type on profit. Then as he needs to earn a certain profit, so she also needs information on what amount of profit is derived by which tray types and what amount of costs are caused by certain tray types. This would help her control her costs as well as knowing the potential of each product type on which she needs to focus. Moreover, it would also help her pricing her products better so that she can earn an appropriate profit from each tray type.

Tray Type

Vegetarian

Chicken

Beef

Total

Operating Margin Contribution Margin per Tray

1,114.02

3,040.17

1,842.52

5,996.7 1

5.06

4.02

3.22

3.75

Operating Profit per tray

2.84

1.80

1.00

1.53

In the above table, different metrics are calculated that would help Angie assess the performance of her business. This information is consistent with the gross margin but also shows tray type is unit wise highly profitable and which product type provides her largest overall profits.

2. Analyze and compare Angie’s overall actual results with her expected results to determine why her accountant is concerned. There is a fundamental issue in comparing her budgeted and actual results. She prepared her budget on the premises that all product types cost her same and so the contribution margin and profit from all tray types will be the same. Therefore, for her, she wanted to just sell as much as possible and that would fulfill her target. However, the reality is different. As calculated by her part-time accountant, the costs of ingredients per type of tray are different. As a result, the profits per tray are also different. Due to this fact, the sales mix become highly important and that is one thing she did not focus on during budgeting. Her accountant is concerned because the product or tray type that is sold highest in numbers, that is 47% of the total sales units has the lowest profit margin. Whereas the product with the highest profit margin sold the lowest. Due to this, the actual results are different in terms of profitability or it is better to say that actual profits are low as compared to budgeted sales. Angie is happy only due to sales figure but the underlying facts are worrisome. Apart from sales per product type, another thing that distorted the results to some extent and decreased the profitability is that variable part of utilities and delivery expenses. They are also seeming slightly different from the budget overall. This is also evident from Appendix 1. However, the major reason why her accountant is concerned is that the costs per units are different but this is not reflected in the selling price. As a result, the costs may not be reflecting the true value of the products in the eyes of the customers and so the sales are either below or above then the expectations for certain tray types and distorting the results. Without rationalizing the pricing strategy, the accountant is concerned that it is not possible for Angie to earn the targeted profit of $4000 per month.

3. Angie’s accountant recommended that your team drill down further into the sales mix and cost figures to determine how the different product types are affecting profits. Look for any sales-mix issues and suggest potential solutions. It is evident from the appendix-1 that different product types are impacting the profits differently. The tray type that is sold highest in numbers, that is 47% of the total sales units has the lowest profit margin. Whereas the product with the highest profit margin sold the lowest. If we look at the Gross margin table, above, we can see that it is the vegetarian tray that is providing the highest per unit profit. This is further confirmed by the contribution margin income statement as provided in the Appendix-1. However, this resulted in the lowest sales of this product among the three tray types which are just 10% overall in the six-month period under review. This is most probably due to the fact that this tray type is overpriced. The customer does not think that it is providing him value for the money and a result he or she refrains from buying it in sufficient quantity. On the other hand, if we look at the beef trays, those sold the highest which is 47% overall as a percentage of total unit sales in the six months under review. However, it provides the lowest profitability. This may be due to the fact that this product is underpriced. As a result, is of lower price than the market or the price which the customer considers it is worth for, its sales increased. However, it provided a lower profit. If we look at the chicken product type, it is the product which has quite some large sales, that is 43% overall but it is providing the highest profits as compared to other tray types. It seems that this tray type is priced fairly due to which it is not only popular among the customers but also providing sufficient profits to the company. The Angie should look to rationalize its pricing strategy and should price the products more in line with the perceived value in the eyes of the customers per product type or tray type. Moreover, Angie should also conduct a market survey about the demand of different tray types and should budget its products accordingly. Moreover, she should also conduct a survey about the pricing of different tray types and rationalize the price of beef and vegetarian tray accordingly. The vegetarian tray is most probably overpriced and she needs to decrease its price. On the other hand, the beef tray is apparently underpriced and she needs to increase its price a little to balance the demand and profitability. However, as mentioned already, this should be done after conducting proper market research so that the steps the company takes and the changes it makes are in line with the market expectations and the profitability of the company increase to the desired level. Moreover, the company should also devise sales target per tray type and that should be based on the premise of increasing profitability. In short Angies’ needs to rationalize the pricing strategy and product mix both.

4. Offer suggestions for how Angie should determine a price quote (per tray) for the specialorder customer. Angie has received an offer to supply of a special order. “a local organic restaurant and catering company, asking for special pricing for large-event orders. Angie previously provided the

customer with an order of 50 trays of empanadas in September. The catering company picked up the trays at Angie’s kitchen, saving delivery costs, and said it would continue to do so” (Keller, and Hammond, 2018). This is an opportunity for Angie to increase its brand equity as well as profitability. This order seems feasible because Angie’s kitchen has the capacity and this special order is also not expected to cannibalize the sales to the other customers. However, the problem for Angie is that how she should quote for this order. There are three types of costs each business incurs. They are fixed costs, variable costs, and Mixed costs. The fixed costs and the fixed cost portion of the mixed costs. Fixed costs are the costs which would incur any way and cannot be avoided. These costs include the fixed cost portion of utilities and delivery costs and also the monthly rent. As they are unavoidable costs irrespective of the fact that whether Angie's’ supplies special order or not, they are irrelevant costs and should not be included in deciding about the new order or costing and pricing the new order. The only costs that are relevant in making this decision about the special order are the variable costs. These are the costs which will change with each new unit produced. Therefore, Angie should price its special order considering only the variable costs. This is because these costs will vary with each unit produced to fulfill the new order. Then, she should add the profit markup she wants to earn from this new order to reach at the price to be quoted. This is because, if she takes into account the total costs of the business in quoting for the new order, she would end up in overpricing it. As a result, she may not be able to secure the order due to higher costs as compared to other competitors.

5. Offer suggestions to improve Angie’s operations and to help her decide whether to continue the business and, if so, how to grow it. Consider potential alternative products, services, and marketing options.

Angie’s business and each underlying product are profitable. Therefore, it is suggested that she should stick to this business. However, she needs to improve the business process in order to ensure that her business is growing and growing profitably. The first suggestion to improve the business is to improve the costing and pricing procedure, make it more transparent with each cost visible to the management so that they can take appropriate decisions for the success of the business. She needs to first rationalize the pricing structure and the pricing should be based on how the customers value the product and ready to pay for it. This would increase the sales of vegetarian trays and while decrease the sales of beef trays to some extent. However, this step is expected to increase the overall profitability of the business. Secondly, Angie’s needs to increase the overall sales of her business so that she can earn the desired profits. She needs to invest more in marketing and sales. Social media is the best

marketing tool these days as it can help you target a specific area and a particular type of customers as well. Therefore, Angie’ needs to market itself using social media. Another selling point that she needs to emphasize on the marketing campaign that Angie’s only make organic empanadas. This may also help to increase the company’s brand equity as nowadays, increasingly people are using organic components in their food. She may also need to increase her product offering. She may need to offer a variant of empanadas, for example, a sweet variant. Moreover, she may also consider offering any other type of appetizers to the same restaurants. The sales are already rising quickly and are more than what Angie has anticipated. Therefore, sales are not as such an issue but for growth purpose, she needs to find new customers and she needs to increase sales per existing customers as well. Again for that purpose, new product, as well as increased marketing and sales efforts, are necessary. So far she is offering empanadas to the restaurants only. But now she should also think about starting her own outlet. As she is already considering the option of shifting her kitchen, she should arrange a kitchen at a place where she can also offer take away at least. Her empanadas are already liked a lot. The only expense she will be bearing due to this strategy is slightly increased rental costs. Otherwise all fixed expenses will remain the same and as a matter of fact, the delivery cost will also be eliminated for such sales. Moreover, the margin on such sales will also be higher. This would also prepare the company and enhance its image to a level where it can start thinking about the option of mass production and selling to mass merchandisers or other restaurants chains and supermarket chains. After reaching this level, the company can think about locations in other cities and states where the company can not only supply to superstores and restaurant chains for overall higher profits. In the end, we can say that Angie’s start of the business is very good and she should stick with it. However, she needs to price the products properly and needs marketing efforts to increase sales revenue.

Appendix 1 Tray Type

Vegetaria n

Chicken

Beef

Total

.Sales @11.5

4,508.00

19,377.5 0

21,183.0 0

45,068.5 0

Ingredients

495.88

3,875.50

5,719.41

10,090.7 9

Labor

1,487.30

6,395.39

6,990.31

14,873.0 0

Trays

117.60

505.68

552.72

1,176.00

Utilities

27.40

117.82

128.78

274.00

Delivery

395.80

1,701.94

1,860.26

3,958.00

Contribution Margin Fixed costs bifurcated by sales(1000+100+350)

1,984.02

6,781.17

5,931.52

14,696.7 1

870.00

3,741.00

4,089.00

8,700.00

Operating Margin

1,114.02

3,040.17

1,842.52

5,996.71

Contribution Margin per Tray

5.06

4.02

3.22

3.75

Operating Profit per tray

2.84

1.80

1.00

1.53

References

Keller, A. C.,` and Hammond, M. R. (2018). 2019 Student Case Competition: Angie’s Empanadas. Retrieved from: https://sfmagazine.com/post-entry/august-2018-2019-student-casecompetition-angies-empanadas/...