CO22001E IP01 Solution

Exhibit I
Storefront closure — Cash impact over next five years
Purpose: To determine the relevant cash flow impact for Misfitz over the next five years if the storefront is closed
Sales (1,176,000) Sales of $1,426,000 less the $250,000 which will continue to be earned over the holiday season
Variable expenses 588,000 Variable expenses are 50% of sales based on provided numbers
Contribution margin (588,000)
Advertising 14,000 $25,000 less increase to ice cream trucks advertising of $11,000 ($13,000 – $2,000 existing)
Rent 138,000 $150,000 – $12,000 for parking spaces
Utilities 16,500 $17,000 – $500 for holiday season
Salary and wages 150,000 $350,000 – $200,000 ($100,000 x 2 for each of the Pines)
Depreciation - Sunk cost
Decrease in cash flow before taxes (269,500)
Taxes 67,375 Assume 25% based on provided numbers
Net annual decrease in cash flow (202,125)
× 5 Five years
(1,010,625)
Residual value of equipment 20,000 Given
Five-year decrease in cash flow (990,625)
Conclusion: Over five years there would be a negative impact to cash of $990,625.
Alternative approach:
Purpose: To determine the relevant cash flow impact for Misfitz over the next five years if the storefront is closed
Operating income lost (116,000) Store closure results in loss of operating income related to store
Depreciation (non cash) (55,000) Sunk cost, not impacting yearly cash flow
Cash flow lost (171,000)
Incremental/new cash flows:
Advertising (11,000) Need to increase advertising for trucks by $11,000 ($13,000 – $2,000)
Parking lease (12,000) Need to rent two parking spots ($6,000 × 2)
Salary and wages (200,000) Continue to pay both owners a salary of $100,000
Winter event — Net margins 125,000 Trucks will cater this event for net cash flow of $125,000 (revenue $250,000 × 50% margin)
Winter event — Utilities (500) Incremental utilities incurred for event
Decrease in cash flow before taxes Net operating
(269,500)
loss
Taxes 67,375 Assume 25% based on provided numbers
Net annual decrease in cash flow (202,125)
× 5 Five years
(1,010,625)
Residual value of equipment 20,000 Given
Five-year decrease in cash flow (990,625)
Conclusion: Over five years there would be a negative impact to cash of $990,625.
Exhibit II
Storefront closure — Cash impact over next five years
Purpose: To determine the incremental cash flow of adding a new truck in Airdrie
Current pricing Increased pricing

Sales 423,000 470,000 Note 1
Variable expenses (211,500) (188,000) Note 2
Contribution margin 211,500 282,000
Advertising 6,500 6,500 Note 3
Rent - - Note 4
Utilities 4,200 4,200 Note 5
Salary and wages - - Note 6
Depreciation - - Note 7
Increase in cash flow before taxes 200,800 271,300
Taxes 50,200 67,825 Assume 25% based on provided numbers
Net annual increase in cash flow 150,600 203,475
×5 ×5
753,000 1,017,375
Less cost of equipment (100,000) (100,000)
Plus residual value of equipment 60,000 60,000
Five-year increase in cash flow 713,000 977,375
Five-year decrease in cash flow if the

store front is closed (Exhibit I) (990,625) (990,625)
Net decrease in cash (277,625) (13,250)
Conclusion: Over five years, the truck could bring in between $713,000 and $977,375 in incremental cash flow.
Note 1:
Assume maintaining current pricing would result in a sales decline of 10%.
$940,000 sales for two trucks / 2 = $470,000 for one truck
$470,000 – 10% = $423,000
Assume increasing current pricing by 25% would see a sales decline of 20%.
$940,000 sales for two trucks / 2 = $470,000 for one truck
$470,000 + 25% – 20% = $470,000
Note 2:
At current pricing levels variable expenses are 50% of sales.
$423,000 × 50% = $211,500
At increased pricing levels variable expenses are 40% of sales (50%/1.25).
$470,000 × 40% = $188,000
Note 3: Assume 50% of revised advertising budget of $13,000 for the two trucks
Note 4: None, as will park at home
Note 5: $12,000 / 2 – 30% savings for energy efficiency
Note 6: Salaries are not a relevant cost, as the Pines will draw $200,000 whether or not they operate the trucks.
Note 7: Non-cash item
Exhibit III
Product mix analysis
Purpose: To determine the product mix for the storefront and for the ice cream trucks
Products
Coconut
Creamsicle Strawberry Soy Agave Almond Coffee Cashew Raspberry Rice
Sales 6.00 6.00 6.00 6.00 6.00

Direct materials 2.56 2.42 2.13 2.85 1.93
Direct labour 0.35 0.35 0.31 0.31 0.35
Variable manufacturing overhead 0.25 0.20 0.22 0.27 0.22
CM per unit 2.84 3.03 3.34 2.57 3.50
Profitability ranking 4 3 2 5 1
Storefront
Average monthly production 4,850 4,190 4,560 3,980 3,620
Average monthly demand 6,200 4,300 4,970 4,210 3,500
TOTAL
Storefront: Current CM total $ 13,774 $ 12,696 $ 15,230 $ 10,229 $ 12,250 $ 64,179
Storefront: Revised CM total
$ 17,608 $ 13,029 $ 16,600 $ 5,731 $ 12,250 $ 65,218
(using units below)
Increase of: $ 1,039
Units to produce based on
ranking:
Raspberry Rice 3,500
Agave Almond 4,970
Strawberry Soy 4,300
Coconut Creamsicle 6,200
Coffee Cashew 2,230 **21,200 – 3,500 – 4,970 – 4,300 – 6,200
Total capacity 21,200
Ice cream trucks

Average monthly production 7,890 6,530 5,920 6,110 7,180
Average monthly demand 8,000 6,600 7,240 6,350 7,640
TOTAL
Ice cream truck: Current CM Total $ 22,408 $ 19,786 $ 19,773 $ 15,703 $ 25,130 $ 102,799
Ice cream truck: Revised CM total

$ 22,720 $ 19,998 $ 24,182 $ 14,186 $ 26,740 $ 107,826
(using units below)
Increase of: $ 5,027
Units to produce based on
ranking:
Raspberry Rice 7,640
Agave Almond 7,240
Strawberry Soy 6,600
Coconut Creamsicle 8,000
Coffee Cashew 5,520 ** 35,000 – 7,640 – 7,240 – 6,600 – 8,000
Total capacity 35,000

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Exhibit I

Storefront closure — Cash impact over next five years

Current pricing Increased pricing

Five-year decrease in cash flow if the

Sales 6.00 6.00 6.00 6.00 6.00

Ice cream trucks

Ice cream truck: Revised CM total

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