Saturday, March 27, 2010

MBA Assignment: Vincent's Cappuccino Express

Three years ago, Vincent Chow completed his degree in accounting. The economy was in a depressed state at the time, and Vincent managed to get an offer of only $20,000 per year as a bookkeeper. In addition to its relatively low pay, this job had limited advancement potential.

Since Vincent was an enterprising and ambitious young man, he declined this offer and started a business of his own. He was convinced that because of changing lifestyles, a drive-through coffee establishment would be profitable. He was able to obtain backing from his parents to open such an establishment close to the industrial park area in town. Vincent named his business The Cappuccino Express and decided to sell only two type types of coffee; cappuccino and decaffeinated.

As Vincent had expected, the Cappuccino Express was very well received. Within three years, Vincent had added another outlet north of town. He left the day-to-day management of each site to a manager and focused his own attention on overseeing the entire enterprise. He also hired an assistant to do the record keeping and to perform selected other chores.

1. What is the competitive strategy of Vincent’s business – cost leadership, differentiation, or focus?
Focus. Vincent chose to focus on only two types of coffee as well as convenience.

2. What are the critical success factors of The Cappuccino Express? Which of these are controllable by Vincent?

a) Threat of substitutes
b) Supplier Power
c) Barriers to entry
d) Buyer Power
e) Degree of rivalry
f) Controlling costs
g) Strategy
h) Advertising
i) Managing inventory

Vincent partly controls all of these, but none of them are fully in his control.

3. What major tasks does Vincent have to undertake in managing The Cappuccino Express?

Vincent will have to hire employees, train these employees, develop a strategy and research competitors and potential competitors. He also will have to study the industry and the economy as a whole. He will have to implement cost and inventory controlling methods as well as monitor crucial ratios of The Cappuccino Express over time and those of other companies, comparatively.

4. What are the costs of operating The Cappuccino Express? Choose a cost object and classify each of these costs as direct or indirect, fixed or variable, controllable or uncontrollable, product cost or period cost, or opportunity cost.

a) Advertising – direct, variable, controllable, opportunity cost
b) Wages – direct, variable, controllable, product cost
c) Inventory – direct, variable, controllable, product cost
d) Plant, property, equipment – direct and indirect, fixed, controllable, period cost
e) Competition – indirect, variable, uncontrollable, opportunity cost

5. Vincent would like to monitor the performance of each site manager. What measure, or measures, should he use?

Cost, profit, employee turnover, revenue, innovation

6. If you had suggested more than one measure, which of these should Vincent select if he could use only one?


7. Suppose that last year, the original site had yielded total revenues of $146,000, total costs of $120,000, hence a profit of $26,000. Also assume that Vincent had judged this profit level to be satisfactory. For the coming year, Vincent expects that due to factors like increased name recognition and demographic changes, the total revenues of this site will increase by 20 percent to $175, 200. What amount of profit should he expect from the site?

Well, if costs remain constant while revenues increase 20 percent, the profit would be 175,200 – 120,000 or 55,200. That said, I would expects costs to increase along with revenue, so profit would most likely be smaller. As long as the costs don’t raise more than revenue, the profit will be somewhere between 26,000 and 55,200

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