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Caribbean Internet Caf

Performance Management and Control, ACC 287.5 David E. Platt, Ph.D.

Caribbean Internet Caf Primary Case-Study Objectives

Observe the diversity of business measurement issues. Introduce fundamental costing issues. Identify strategic and non-financial issues that are critical for decision making.

Caribbean Internet Caf Cost Summary

Here is a listing of costs to be incurred (pg. 3-4). How can we organize this data in a useful way?
Usage Qty Unit from Exhibit 1 180 hrs/wk 1 per month 1 per month 1 per month 1 ea 1 per month on demand 1 per month 1 per month 1 ea 1 ea 1 per month Cost Jamaica $ 1,426,000 J$ 40 J$ 40,000 J$ 30,000 J$ 15,000 J$ 7,000 J$ 10,000 J$ 60 J$ 10,000 J$ 10,000 20,000 120,000 J$ 50,000 US $ 40,743 1 1,143 857 429 200 286 2 286 286 571 3,429 1,429 Unit per hour per month per month per month per month per computer per hour connected per month per month

Equipment Waiter-tutors Manager Building lease Utilities Utility deposit Internet link Internet service Insurance Advertising, mktg, promo Pre-opening advertising Other up-front costs Miscellaneous admin/main

$ $ $ $ $ $ $ $ $

Caribbean Internet Caf Cost Summary

Here is a listing of costs to be incurred. How can we organize this data in a useful way?
Usage Qty Unit ea ea Exhibit 1 ea Jamaica $ J$ 7,000 $ 20,000 1,426,000 120,000 1,573,000 $ US $ 200 571 40,743 3,429 44,943 Cost Unit

Start-up Costs Utility deposit Pre-opening advertising Equipment Other up-front costs Total Operating Costs Waiter-tutors Manager Building lease Utilities Internet link Internet service Insurance Advertising, mktg, promo Miscellaneous admin/main

1 1 from 1

J$

180 1 1 1 1

hrs/wk per month per month per month per month on demand 1 per month 1 per month 1 per month

J$ J$ J$ J$ J$ J$ J$ J$ J$

40 40,000 30,000 15,000 10,000 60 10,000 10,000 50,000

$ $ $ $ $ $ $ $ $

1 1,143 857 429 286 2 286 286 1,429

per hour per month per month per month per month per computer per hour connected per month per month

Caribbean Internet Caf Fixed Costs

How fixed?
Jamaica $ One-Time Costs Utility deposit Pre-opening advertising Other up-front costs Total J$ 7,000 20,000 120,000 147,000

Cost Unit

Annualized

J$

Least

Most

Fixed Costs Waiter-tutors J$ Advertising, mktg, promo J$ Miscellaneous admin/main J$ Utilities J$ Insurance J$ Manager J$ Internet link J$ Building lease J$ * Loan interest J$

40 10,000 50,000 15,000 10,000 40,000 10,000 30,000 1,250,000

per hour (x 180 x 52) per month per month per month per month per month per month per month at 10% "concessionary rate"

J$ J$ J$ J$ J$ J$ J$ J$ J$

374,400 120,000 600,000 180,000 120,000 480,000 120,000 360,000 125,000

What about investment in equipment?

Caribbean Internet Caf Fixed Costs

Depreciation is annual fixed cost.

Investment General equipment Hardware and software Furniture and artwork China and flowers Total (exhibit 1) J$ 573,250 407,750 340,000 105,000 1,426,000 Est'd Life (yrs) Annualized 114,650 135,917 34,000 52,500 337,067 5 J$ 3 10 2 J$

J$

Jamaica $ Fixed Costs Waiter-tutors Advertising, mktg, promo Miscellaneous admin/main Utilities Insurance Manager Internet link Building lease * Loan interest ** Depreciation Total J$40 J$10,000 J$50,000 J$15,000 J$10,000 J$40,000 J$10,000 J$30,000 J$1,250,000

Cost Unit per hour (x 180 x 52) per month per month per month per month per month per month per month at 10% "concessionary rate" from above

Annualized 374,400 120,000 600,000 180,000 120,000 480,000 120,000 360,000 125,000 337,067 J$ 2,816,467

Caribbean Internet Caf Revenues and Variable Costs

Variable with what? Look at demand. Based on # of customers.

Average Variable Cost per Customer Visit Internet service Coffee and beverages Food Total per customer J$ 24 J$60/computer/hour x 40% usage x 1 hr/visit 50 per person 30 per person 104

J$

Revenues (per customer) modeled similarly.

Average Revenue per Customer Visit Internet service Coffee and beverages Food Total per customer J$ 48 J$120/computer/hour x 40% usage x 1 hr/visit 140 per person 60 per person 248

J$

Caribbean Internet Caf Contribution Margin

Contribution Margin The difference between price or revenue and variable costs. The portion left over to contribute to fixed cost and profit after covering variable costs.
Revenue per customer visit Variable cost per customer visit Contribution margin per customer visit J$ J$ 248 104 144

Caribbean Internet Caf Profitability

Sensitivity Analysis:
CM_P CM_R CM_O

CM per customer visit Target market population Market penetration Visits per customer Total contribution margin Fixed costs - Ongoing Profit - Ongoing One-time costs Profit - Year 1

144 20,000 30% 2 J$ 1,728,000 J$ 2,816,467 -J$ 1,088,467 J$ 147,000 -J$ 1,235,467

J$

144 20,000 40% 3 J$ 3,456,000 J$ 2,816,467 J$ 639,533 J$ J$ 147,000 492,533

J$

144 20,000 50% 5 J$ 7,200,000 J$ 2,816,467 J$ 4,383,533 J$ 147,000 J$ 4,236,533

J$

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Caribbean Internet Caf Other Issues

Multi-year venture Cash flow How to analyze competitive environment and new venture risks? Ownership and control issues? Risks?
Loss of investment Loss of reputation Low barriers to entry (esp. JTL and current ISPs) Cultural barriers (internet and caf/coffee)

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Caribbean Internet Caf Other Issues

Cash Flow
Year 1
CM_P CM_R CM_O

Cash Required One-time costs Cash fixed costs (excl. depreciation) Equipment investment Total cash required Cash Available David Grant ownership investment JTL ownership investment JTL "concessionary rate" loan Annual contribution margin Total cash available

147,000 2,479,400 1,426,000 J$ 4,052,400

J$

147,000 2,479,400 1,426,000 J$ 4,052,400

J$

147,000 2,479,400 1,426,000 J$ 4,052,400

J$

500,000 500,000 1,250,000 1,728,000 J$ 3,978,000

J$

500,000 500,000 1,250,000 3,456,000 J$ 5,706,000

J$

500,000 500,000 1,250,000 7,200,000 J$ 9,450,000

J$

Ongoing

Cash Required Cash fixed costs (excl. depreciation) *Depreciation (reinvestment) Total cash required Cash Available Annual contribution margin Total cash available

J$ 2,479,400 337,067 J$ 2,816,467

J$ 2,479,400 337,067 J$ 2,816,467

J$ 2,479,400 337,067 J$ 2,816,467

J$ 1,728,000 J$ 1,728,000

J$ 3,456,000 J$ 3,456,000

J$ 7,200,000 J$ 7,200,000

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Caribbean Internet Caf Key Takeaways

Different costs for different purposes.

Fixed Variable Start-up/One-time Liquidity

Contribution margin Sensitivity analysis Non-financial factors