Giancarlo works for the School District but recently lost his job working on backyard fabrications. He is concerned about his income during retirement and is not confident in the state’s retirement pension plan and whether it will suffice. He believes that the state pension plan that he has been contributing in will go bankrupt or run out of money. Rather than have this possible scenario play out he is thinking about pulling out his retirement money and starting a franchise. He believes that by starting a franchise and if everything goes to plan he can receive monthly cash flow and net income, which would result in a better investment return, and income for retirement. Giancarlo points to the variety and frequency of all the Subways, Starbucks and Pizza franchises all over each city as proof that this is the way to go.
The franchise the Giancarlo is interested in is called “Diego Dogs”. This franchise sells hot dogs and chili dogs. He knows of a particular area near the high school that receives a lot of foot traffic and would be a good location.
Giancarlo does not know much about Hot Dogs; the restaurant business and cost accounting so has hired you as an emerging cost consultant to help him come up with the costs and business plan.
In his preliminary talks with the Vice President of Franchise Development, Giancarlo has learned that there are other potential investors or groups looking to secure this particular franchise, so he wants to move quickly and deliver a knockout sales pitch. He also knows that the Vice President is very keen on having his franchisees having strong cost accounting. Diego Dogs requires that franchisees complete their financial statements and reports 15 days after the end of the month.
Key Information
Giancarlo has $150,000 in his 401 K and is thinking about pulling out and using the entire amount as well as another $14,000 in Cash in the bank. He also can borrow $15,000 on his consumer credit card at 19% monthly interest. He also can secure a Line of Credit from the local bank for $20,000 with a 22% interest rate on the monthly balances utilized. Diego Dogs also has a startup loan program for new franchisees. New owners can receive a jumbo loan of up to $100,000 at 8% interest, but the minimum amount required for this $60,000.
The Franchise Fee for starting a Diego Dogs is $50,000 payable up front. The Franchise fee is amortized over 15 years starting in January 2019. In addition Diego Dogs corporation takes a royalty of either 7% of monthly sales or a minimum of $3,000 a month payable in the following month. New Franchises must also pay a $5,000 a year Advertising Fee, which can be paid over 12 months.
Giancarlo is fortunate because the location he has in mind happened to be a site where the previous owner was a fast food business. The owner went out of business because their cost projections and profit margins were grossly inaccurate. The Landlord has given Giancarlo a favorable monthly rent at $3,000 per month with a initial mandatory Safety deposit of $10,000.
The only kitchen equipment that Giancarlo would have to purchase would be the mandatory deep fryer and support equipment required by all franchisees. Giancarlo can purchase the Deep Fryer and support equipment outright for $80,000 or he can lease it from Diego Dogs at $4,000 per month. The equipment would be depreciated over 7 years at the start of January 2019.
Giancarlo would also have to spend an additional $20,000 in painting, construction, lighting, kitchen setup to remodel the restaurant which will bring it up to Diego Dog Franchise specifications.
Listed below are a list of variable and fixed costs. Costs that are mandatory are underlined and are not subject to corporate restrictions.
• Annual Business License $500
• Constant Contact $100
• LinkedIn $70
• Monthly Chamber of Commerce dues $110
• Monthly Better Business Bureau fee $100
• Monthly Accounting Expense $600
• Monthly Exterminator $300
• Monthly Cleaning Supplies $400
• Monthly Telephone bill $179
• Monthly Internet and Website $90
• Monthly General/liability Insurance $210
• Monthly Electricity including Gas, Water, Electricity $440
• Monthly Business Trash/Waste Disposal $658
Diego Dogs sells three types of hot dogs; a regular Diego hot dog, a regular Diego chili dog and the 1-foot 1 ¼ pound Super Diego Dog. Corporate sets the sales price at $5 for a Diego dog, $6 for a Chili dog and $8 for the Super Diego Dog.
Corporate also allows each Diego Dog Franchise to create their very own Diego dog item, which is unique to each store and also caters to local flavor of the neighborhood. This is an area where the vice president pays close attention to. The Custom Super Diego Dog can sell for any price.
Franchisees are required to purchase the hot dogs from corporate wholesale at a box of 30 for $3 and a box of 30 of Super Diego Dogs for $5. Assume $0.10 per bun for Diego Dogs and Chili Dogs and $0.25 per bun for Super Diego dogs and custom dogs. In addition each time any one box of hotdogs is purchased the franchisee is required to purchase a Condiment box and container box to accompany and support the required hot dogs.
Basic Package $3 per any one box ordered
Ketchup; tomatoes; Cheddar cheese; Relish; Pickles; Onions; mayonnaise
Sauerkraut; Mustard; Honey Mustard;
Napkin Container Package $5 per any box. The Napkin container package includes, paper plates, napkins, and all appropriate utensils with the Diego Dog logo.
Diego Dogs also offer premium condiments listed as follows Hickory smoked Bacon $2; Fresh Avocado $2; Chili $1. Pork and Beans $2. These items are add hoc items ordered at the customer discretion. These items cost $12 per week
In regards to Labor he expects that he would have two hire a minimum of 2 workers at the prevailing wage of $15 and he expects his shop to be open from 10:00AM to 10:00pm Monday through Sunday. Diego Dog policy is to have at least 2 employees whether part time or full time for each shift. The 1st shift is from 10:00am to 4pm and the Second shift is from 4:00pm to 10pm. If he can include a 3rd or possible 4th employee whether part time or full time he can improve the efficiency of operations by 30% and customer service by 50% for each additional worker beyond two employees. Each extra employee also brings a 7% increase in sales. You may ignore payroll taxes and Fringe benefits in regards to this calculation.
He was thinking of recruiting kids from the high school and perhaps using part time labor but is not sure what to do.
Historically when a new franchise is open the following hot dog sales occur
Menu Item Jan Feb March
Diego Dog 550 501 409
Chili Dog 145 140 138
Super Diego Dog 85 84 105
Custom Diego Dog 15 24 45
Using what you have learned in the class present your report, findings and analyzes in a written report due on June 8th, 2021 at 5pm
There is no page limit on the written report but the report must contain at least four of the items a listed below. You are free to choose more than four items, but they will be evaluated accordingly. The written report will be inspected for spelling, grammar, punctuation, mathematical and statistical accuracy in regards to the cost accounting objectives being demonstrated, readability and visibility.
Remember that in any cost or consulting engagement the client is asking us (in this case you) to come up with the answer or what you believe the answers should be. You must also have your substantiation and support for you reasoning. You cannot ask your instructor for the answers and the instructor will not verify or review any information. You can ask for clarification and explanation on anything related to the cost concepts in class. Throughout the project you must use the cost concepts and tools that you have learned and utilized from the class. It is also your chance to demonstrate your knowledge, creativity and entrepreneurial spirit with this project.
Items that need to be specific Required Written Report-
1. Calculate the following items (if applicable)
a. Direct Materials
b. Direct Labor
c. Fixed Manufacturing Overhead
d. Contribution Margin
e. Variable Overhead
f. Variable costs
g. Break- Even Point in Sales
h. Breakeven point units
i. Margin of Safety
j. Any other additional ratios, costs or expenses that your group can identify that is relevant information and can impact the decision-making process.
2. Create a three-month Cash projection Budget based on your costs and factors.
3. Prepare a Cost Volume Production report showing the relevant range of activity needed to achieve profitability.
4. Create a menu showcasing all of the food items available.
5. Identify and recommend which food items we would prefer our customers to purchase and why?
6. Prepare a projected three-month Income Statement.
7. Identify what the monthly cash inflow or outflow is projected to be.
8. Identify the Financing and Capital needs and possible options required for this project.
9. Analyze the opportunity cost and provide options if Giancarlo cannot secure the franchise.
10. Prepare a Conclusion and your overall recommendation, or strategic options for the project.
Progress Reports-
Just like a real client consulting engagement, your client can and will demand an update as to the progress of the engagement. Since this project is a significant portion of your grade you will and can be asked to submit a progress report. This is to make sure that you do not start the project one week before the due date and to ensure that consulting engagement is moving forward. Progress reports will be announced at the instructor’s discretion and students will always be given at least one class meeting notice before a progress report is due. Progress Reports can also be voluntary submitted by the team at any time. The progress report will consist of a one-page summary of your activity. The report can include charts, graphs and any information which you feel demonstrated progress. Progress reports represent a portion of your overall grade for this project.