The Valuation and Financing of Lady M Confections

CASE STUDY:

The Valuation and Financing of Lady M Confections

Questions for Break-Even Analysis 

1. How many cakes would Lady M need to sell in a year in order to break-even? Does this number seem feasible?

Breaking even means that Lady M Confections is neither benefitting or incurring any sort of loss - they are simply making the same amount that they are putting into their business. In order to find the number of cakes that must be sold to break-even, we must find the information missing from the chart below. Firstly, the COGS is calculated by adding together the amount for rent, utilities, and labor totaling = $943,994. In the assumptions we are told that the COGS is half of the amount of Gross Sales. Therefore, (COGS) $943,994 x 2 = $1,887,988 (Gross Sales). In order for this to be a break-even analysis, the total cost must equal the gross sales. We are told that the sales price of each cake is $80 and the COGS is 50%, thus the profit or contribution made from each cake is $40. To find the number of cakes sold per year, we must divide the COGS amount ($943,994) by the profit made from each cake ($40). By doing so, we get 23,599.85 or 23,600 cakes sold each year to break-even. To complete the chart below we must find the number of cakes they must sell per day. To calculate this, we would take the 23,599.85 (or 23,600) divided by the total number of days in one year (365) = 64.66 or 65 cakes per day. This is absolutely feasible because the case mentions how Lady M Confections churns out approximately 7,000 crepes per day which is far more than the amount needed to break-even.

2. Assuming sales in year one are break-even, how quickly would sales need to grow after the first year to pay the start-up costs within 5 years? Is this growth rate feasible?

Sales would need to grow at an annual rate of 13.55%. This is because the current sales are $1,887,988 and the start-up costs were $1,000,000. The formula for annual growth rate is (current value/past value)^(⅕) x 100. ($1,887,988/$1,000,000)^(⅕) x 100 = 13.55%. This growth rate is feasible since the case details how successful the business has been. This growth rate is feasible because the case mentions how the growth rate for 2013 was 81.3%. One must also consider that on their opening day, Lady M Confections completely sold out of their Mille Crepe within hours and has continued to do well, thus this growth rate is feasible.

3. What is your recommendation? Should Romaniszyn open the new location in the World Trade Center?

I believe that the benefits of opening this new location in the World Trade Center definitely outweigh the cons. This is because opening the location would attract more customers because of its location and it would also open up the business to much more opportunity like corporate catering since the building is so large. Also, the added amount of seating space (1,000 seats within 560 square feet of the business) that is in close proximity will make the business more attractive to consumers because people may want to come sit down and have their sweets. Overall, I think after monitoring the success of the Bryant Park location, Lady M Confections should make the decision to open up the new location in the World Trade Center.

Assumptions                                                                                       ▷ Rent: $310,600 (annual escalation of 3%).                                                ▷ Utility Costs $38,644 (annual escalation 3%)                                                ▷ Annual labor $594,750 (annual escalation 5%)                                                 ▷ Cost of goods sold (0.5 * Gross sales) at an average price of $80/cake

Is the number for year one feasible? Let’s compare to information in the case about a similar location: Bryant Park opened in July 2013, with $1.15 million sales.