Start-up costs

The initial setting-up costs for a new business are the start-up costs(Fonseca, Lopez-Garcia, & Pissarides, 2001). The startup costs for the Caribbean Internet café are One-off advertising costs, miscellaneous setting up costs, deposits and equipment.

Start-up Costs
Equipment 1,426,000
Deposit for Utilities 7,000

Caribbean Internet Café Case Solution

Caribbean Internet Café Case Solution

Advertising expense for 1st year 20,000
Miscellaneous Expenses 120,000
Total Start-up funds needed 1,573,000

Cost for the First Customer

The costs directly associated with the customer will be $140.
Cost directly associated with the first customer
Internet Charges 60
Average Cost of Food 30
Average Cost of Drinks 50
Total cost 140

Note: Assuming that the customer uses internet.

 Breakeven Analysis

The break even analysis refers to the

calculation for sales to cover-up all the costs (fixed and variable) (Powers, 1987).The break even analysis shows that a total of 16,608 (rounded up) visits to CIC are needed to break even in the first year.

Breakeven for first year
Revenue per customer 320
Variable Costs per customer 140
Contribution 180
Total Fixed Costs 2,989,400
Number of visits 16,607.778

The breakeven analysis shows that a total of 16,608 (rounded up) visits to CIC are needed to breakeven in the first year.Breakeven for the second year

Revenue per customer 320
Variable Costs per customer 140
Contribution 180
Total Fixed Costs 2,743,400
Number of visits 15,241.111

 Conclusion & Recommendation

The project seems to be profitable for the optimistic and realistic projection of the number of visits by the locals. The pessimistic approach results in a considerable loss for David and JTL, due to the high fixed costs. It should also be considered that the proposal does not include income taxes and can reduce the profits by 10% to 40% depending on the applicable tax rates.

The overall projections are positive and the business can provide profit before taxation margins of 12%-36%. It is advised that David should consider reducing the fixed costs by adjusting working hours for the part-timers. It should also try to reduce the miscellaneous expenses to make this project more viable.

References

Chambers, C., Kouvelis, P., & Semple, J. (2006). Quality-based competition, profitability, and variable costs. Management Science, 1884-1895.
Fonseca, R., Lopez-Garcia, P., & Pissarides, C. (2001). Entrepreneurship, start-up costs and employment. European Economic Review, 692-705.
Powers, T. L. (1987). Breakeven analysis with semifixed costs. Industrial Marketing Management, 35-41.
Spence, M. (1976). Product selection, fixed costs, and monopolistic competition. The Review of Economic Studies, 217-235………………………….

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