Cat & Joe\'s Pig Rig - Grade: a- PDF

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Case Study Cat and Joe Pig Rig...

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TO: Cathy Obertowitch and Joe Thompson, Owners of Cat and Joe’s Pig Rig FROM: Jamye Ashley, Richard Hoefer, and David Salgado DATE: May 24, 2019 SUBJECT: Attending the “Bullarama” Rodeo Case Study 1 is about the Co-Owners of a BBQ truck, Cathy Obertowitch and Joe Thompson, and their decision about attending “Bullarama” as food providers. Cat and Joe’s truck, the Pig Rig, is located in Kamloops, British Columbia, Canada. At the time of the case study, the Pig Rig has been in operation for several months and has been outperforming projections in sale and customer growth. Currently, Cat and Joe serve between 75-125 people a day, selling its signature dish the “Ripped Pig” combo for $12 each with 40% of revenue going to variable costs and a corporate income taxes for small businesses of 20%. Fixed costs for the pig rig includes gas, maintenance, business licenses, and depreciation amounts to a yearly cost of $10,000. The Pig Rig operates 180 days out of the year. They use a simple trend forecasting method when attending events. They assume 35% of all attendees will want food, and there will be equal distribution among all vendors of that 35 %. “Bullarama” is a charity rodeo event, with 700 people attending according to ticket sales. Cat and Joe remove bottlenecks by only serving the sandwiches that allow for a lower cost to customers and a shorter lead time from order to delivery. Attending the event would add an extra $100 in fuel costs for the truck, $100 in a donation, and $30 to take another vehicle to their fix costs. Cat and Joe wonder if they should stay in Kamloops, or attend the event. Advantages and disadvantages of food truck business compared to traditional restaurants. Owning a food truck comes with many advantages over a traditional restaurant. Food trucks have a lower investment and operational cost due to buying or renting a truck over real estate. The equipment is smaller, and cheaper to operate requiring less startup capital. Labor costs are lower when operating a food truck over a conventional store due to a smaller workforce needed, and most times owners are the workforce and do not draw a paycheck. Food trucks have the luxury of having the flexibility of moving from location to location where their customers are and attending events to create a revenue stream not available to standing stores. By following the customer they do not have the spend money on marketing. The advantages of owning a food truck can quickly turn into a disadvantage if not properly managed. With smaller and cheaper equipment there is also limited cooking space causing a bottleneck for orders. There is also limited cold storage causing limited variety and amount of food carried. The mobility and flexibility advantage become canceled because of the potential for the truck to break down causing a loss of revenue until the truck is fixed. Sales are weather dependent, which causes a shorter selling season. The savings on marketing could be wasted if current customers do not know the current location of the truck, as well as increased competition from other trucks not respecting the sales boundary. Cost-Volume-Profit Analysis baseline of Kamloops operations The break-even point on a typical day in Kamloops can be found using the information stated below. ○ ○ ○ ○

Total Fixed cost per year = $10,000 Operational time - 180 days Price = $12 Variable costs= 40% of revenue

The fixed costs on a typical day are found by taking the total fixed cost per year and dividing it over the total yearly operational time of 180 days. This dollar amount per day is then divided by revenue generated per sale which is the unit price subtracted by variable cost.

○ Break even for a typical day = $10,000/180 days = $55.60/day ○ $55.60 / (Price per unit $12- Variable cost per unit $4.80)= 7.716 units/day The break-even for a typical day using the level plan that the ripped pig needs to sell is 7.7, rounded to 8 “ripped pig” sandwiches. The break-even number is very important and relevant to entrepreneurs because the bottom line is it helps them know the minimum sales volume to avoid a loss. It is also important when planning a target profit level when comparing situations. When setting profit levels, knowing the break-even point allows an entrepreneur to set the optimum price and manage and schedule inventory requirements. For example, if the Pig Rig wanted to make $100,000 profit for the year (after tax) they would need to know how many pulled pork sandwiches they would need to sell each day. ○ ○ ○ ○ ○ ○

Fixed cost per day = $55.6 Corporate Income Tax = 20% Contribution Margin (CM) per unit = 12 - (12 ⋅ 40%)= $7.20 / unit Desired Yearly Income (Before Tax)= $100,000 / (1-20%) = $125,000 Desired Monthly Income (Before Tax)= $125,000 / 180 days = $694.44/day Daily Sale of Units required = (55.6 + 694.44) / 7.20 = 104.17 units/ day

By using the same calculations in the break even model with the addition of finding the pre tax income amount it was found the Pig Rig needed to sell 105 “ripped pig” sandwiches a day.

Contribution-format income statements Contribution income statement for a regular day in Kamloops, Table 1, compares the income and revenue from optimistic (125 customers), realistic (100 customers), and pessimistic( 75 customers) projections. The sales per day are found by multiplying the number of customers projected by the costs per unit ($12) as a starting point. Using the data and solutions found earlier, the total profit per day for each projection is found.

Table 1: Contribution Margin Income Statement for Regular, Non- Event Day

Contribution income statement for the Bullarama Event, Table 2, compares the projections of having no competitors, 1 competitor, and two competitors. Using the same forecasting method that Cat and Joe use. The total sales were found by assuming 35% of the 700 people attending would order food, which was found to be 245 potential customers. Of those 245 customers, it was assumed to be an equal distribution among all competitors. With no competitors, the Pig Rig will receive all 245 customers, with one competitor the pig rig will receive 122 (+/- 1) customers, and with 2 competitors the pig rig will receive only 81 (+/- 1), customers. With the decreased price of the ripped pig due to streamlining of $9, the price is then multiplied by the number of potential customers to find the total sales at the Bullarama event. Using the data and solutions found earlier, the total profit per day for each projection is found.

Table 2: Contribution Margin Income Statement for Bullarama Event

Differential Analysis Differential analysis was performed showing the gains and losses of going to Bullarama over staying at Kamloops based on them being the only competitor and customer demand forecast model Cat and Joe used. Optimistically Bullarama will have all 700 ticket buyers present, realistically 90% of them will attend and pessimistically only 80% will attend. Each customer demand level showed Cat and Joe obtaining a differential profit of $364 meeting all optimistic conditions and 425.6 meeting all pessimistic conditions, and realistic forecast have a differential profit of $395.05

Based on the differential if they are the only food truck in attendance Cat and Joe stand to almost double their realistic and pessimistic profits at Bullarama. Non Financial advantages and disadvantages of attending “Bullarama” Attending Bullarama presents many new opportunities for the Pig Rig in nonfinancial terms. Bullarama will give the Pig Rig future potential opportunities at events from networking based on performance and reviews of customers. This is also a chance to acquire new customers and business prospects as well as a chance for increased free marketing. The downside is that the newly acquired customers may not be repeat customers and the loss of opportunity cost of acquiring new customers for increases local business since they are not Kamloops. Attending Bullarama is also putting extra stress on Joe who already practically works 24 hours a day preparing the meeting, and working in the truck. This could lead to a reduction in the quality of goods sold leading to customer dissatisfaction. Along with extra stress, attending Bullarama will make Joe trust his forecasting even more because he will not be able to leave and get more supplies if he is running low as he does in Kamloops if high demand projections are not high enough. Recommendation for an onsite competitor Looking at the financial data, Cat and Joe stand to lose 23 to 383 dollars in potential profit, due to an increase in fixed costs from additional fuel and donation if attending Bullarama. While they still can go and make a profit given the number of customers present, they would need to

increase their prices from $9 to at least $9.83 to match a realistic profit on a normal day in Kamloops. Additionally, they could face the risk of more than 1 competitor at the event hurting their sales even more. Attending Bullarama also presents non-financial disadvantages by letting down regular loyal customers, when business is growing locally. The risk of losing additional customers as well as regular customers is more costly than obtaining new non-regular customers. Our recommendation is to stay in Kamloops and keep building the advantage in the market they already possess and build the local foundation of their business that has helped them thrive and achieve profitability....