- What costs should Riley consider for her food truck venture? What costs are fixed? What costs are variable? Estimate each cost.
Common food truck startup costs include the initial costs such as the cost of the truck, licenses, and permits as well as Daily operating costs such as food costs, staff wages, fuel costs, parking lease cost, market research, advertisement, and insurance (Noreen et al., 2017). These costs can be categorized into fixed and variable costs. While variable costs vary depending on the units produced, fixed costs remain unchanged regardless of production output. In this case, parking lease, insurance cost, cost of the truck, and the cost of acquiring a business permit and a license are fixed costs. Variable costs include food inventory costs, staff wages, fuel costs, and miscellaneous costs.
A simple food-truck, with minimal storage and a mobile kitchen, cost a minimum of $15,000 while its permits and licenses are estimated at $200 (Rockefeller, 2015). The insurance cost for starting a food truck, on the other hand, is estimated at $300. Event parking lease cost is around $200-$1000. In general permits, Licenses, parking, and insurance are estimated at $3500 per year on average. The food inventory cost for cupcakes and coffee can be as high as $20,000 in a month. In this case, it is assumed that the cost of buying the two products is 35% of the selling price held at $3.25 for a cupcake and $2.10 for coffee. Typically labor cost is estimated at $6,757 in a month. The cost of fuel in a month can be as low as $250 while miscellaneous costs are projected at $ 1000 per month. The intended advertisement and marketing research can cost approximately $500 in a year.
- Based on your answer to question #1, what is Riley’s break-even unit for cupcakes and coffee if she expects a 50/50 split between the two? What is she expects that 25% of her sales are cupcakes while 75% are coffee?
The breakeven point in this case refers to the units of coffee and cupcakes that Relay need to see in order to breakeven, that is to make profit with zero losses (Noreen et al., 2017). The significance of calculating the breakeven point is to compare revenue and sales to the costs associated with producing and selling goods or services. The breakeven point is calculated using the following formula:
Fixed costs=$3500+$15,000= $18, 500
The sales price per unit is calculated as follows:
(Sales price of a cupcakes x Sales percentage of cupcakes) + (Sales price of coffee x Sales percentage of coffee) = ($3.25 x 0.5) + ($2.10 x 0.5) = $ 2.675
or ($3.25 x 0.25) + ($2.10 x 0.75) = $ 2.3875
The variable cost per unit is worked out as follows:
(Variable expense of cupcakes x Sales percentage of cupcakes) + (Variable expense of coffee x Sales percentage of coffee) = (0.35 x $3.25 x 0.5) + (0.35 x $2.10 x 0.5) = $ 0.93625
Or (0.35 x $3.25 x 0.25) + (0.35 x $2.10 x 0.75) = $ 0.835625
BEP = 18,500/ ($ 2.675 – $ 0.93625) = 10, 639
or 18,500/ ($ 2.3875 – $ 0.835625) = 11,921
- If Riley’s market analysis indicates that she can sell 2,000 cups of coffee and 3,000 cupcakes monthly, what is her margin of safety?
The margin of safety in accounting refers to the difference between actual sales and breakeven sales (Noreen et al., 2017). The margin of safety is significant in that it enables Relay to estimate the number of sales that she can decrease before the business becomes unprofitable.
Margin of safety =10, 639- (2000+3000) =5,639
or 11, 921- (2000+3000) = 6,921
- Should Riley purchase the food truck? What other factors should she consider?
Riley whose retained earnings from her bakery amount to $5,000 is not in a position to purchase an expensive food truck. Given that there are other costs to cater to such as food costs, licensing, and wages, Relay will be much strained if she takes a loan to buy a new truck. Buying a used food truck will not be good enough either given that it goes for an average cost of $50,000. Relay has two alternatives that include acquiring a food trailer or renting a food truck. However, a food trailer which goes for around $15,000 is disadvantageous because it requires an operational vehicle to move it and, therefore, attracts repair costs (Rockefeller, 2015). The only advantage is that the vehicle can be changed in case of failure to avoid losing on revenue. Nevertheless, the best option for Relay would be to rent a food truck. A rented food truck costs around $2,000 to $3,000 per month which offers a superb starting point that can be managed even with her current savings (Rockefeller, 2015). Most of the rented trucks come with a commissary kitchen included and it will save in maintenance and repair costs. Again, Relay will be able to test her idea before considering a massive investment.
References
Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2017). Managerial Accounting for Managers. College Ie Overruns.
Rockefeller, J. (2015). How to Start a Successful Food Truck Business. J.D. Rockefeller.
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