CARIBBEAN INTERNET CAFÉ
What are the fixed, variable (costs varying by customer) and start-up costs that David Grant has
to consider?
How many customer visits will CIC need to break- even in the first year? What will be the year 1
profit under the realistic scenario?
How many customer visits will CIC need to break-even in year 2? What will be the year 2 profit
under the realistic scenario?
How will year 2 profit change under the optimistic and pessimistic scenarios?
What are the strategic and managerial considerations that David Grant should take into account
in deciding whether to go forward with the start-up or not? Should David Grant proceed with
the start-up?
Question 1: Fixed and Variable expenses that David must consider.
Fixed/Month Variable/Hour Start Up Cost
Manager Pay 40000 Internet Service Equipment 1426000
Lease 30000 $60*.40=$24 24
Phone/Utility 15000 Advertising 20000
Before Opening
Internet Link 10000 Drinks 50
Insurance 10000 Utility Deposit 7000
Advertising 10000 Food 30
Admin/Main 50000 Other 120000
Miscellaneous
Employee 28800
Wages
Total 193800 Total 104 Total 1573000
Question 2: Customers needed for break even and year 1 realistic scenario.
Average Customer
Food per hour $140 Customer Per hour $248
Drinks per hour $60 Variable Expenses Per $104
customer per hour
Computer Price per $48 Contribution Margin $144
hour Per Customer per
$120*.40= $48 hour
Total Customer per $248
hour
Fixed Expenses 193800 Total Expenses 1766800
Start Up Expenses 1573000 Divided by Contribution 144
Margin per customer
per hour
Total Expenses 1766800 Customer Visits to Break 12,269
Even in first year
Potential Customers 20000*.40=8000 Total Visit count 24000
Population to visit 8000 Minus Break Even point 12,269
Times to visit per year 3 Difference 11731
Total Visits count 24000 Multiplied by 144
Contribution Margin
Total Profit First Year 1689264
Question 3: Year two break even and realistic scenario
Fixed Expenses 193800 Total Expenses 193800
Start Up Expenses None Divided by Contribution 144
Margin per customer
per hour
Total Expenses 193800 Customer Visits to Break 1345.83 = 1346 visits
Even in second year
Total Visits Minus Break 24000 – 1346 = 22654
Even
Multiplied by 144
Total Profit Year Two 3262176
Question 4: Year two Optimist and Pessimistic
Optimistic
Potential 20000*.50=10000 Total Visit Count 50000
Customer
Population to 10000 Minus Break Even 1346
Visit
Times to visit per 5 Total Visits Minus Break Even 50000 – 1346 = 48654
year
Total Visit Count 50000 Multiplied By Contribution 144
Margin
Total Profit year 2 Optimistic 7006176
Pessimistic
Potential Customer 20000*.30=6000 Total Visit Count 12000
Population to Visit 6000 Minus Break Even 1346
Times to visit per year 2 Total Visits Minus Beak Even 12000 – 1346 = 10654
Total Visit Count 12000 Multiplied By Contribution 144
Margin
Total Profit year 2 Pessimistic 1534176
Question 5:
I would recommend to David to continue with his venture with JTL, however to continue cautiously. The
Caribbean Internet Café may lose money in his first year but that is mainly due to the expenses incurred
in purchasing the equipment for business operations. Most of those expenses will be funded by the loan
from JTL, and this expense will not appear in year two. The $20,000 advertising fee was also a onetime
expense. In year two sales may increase as the organization establishes itself in the community. David
should consider reducing the fixed costs by adjusting work hours for the part timers he should also try to
reduce the miscellaneous expenses to make the project more viable.
