Edible Art Studio Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Edible Art Studio Case Study Help

Financial Implications of Alternatives

Renovation of familyhome

Perry has an opportunity to renovate her family home with core consideration on creating a separate space for the business, due to which the operating income is calculated for the upcoming year, to assess the feasibility of the presented alternative. One of the most significant requirement is to obtain the $500 building permit from the city, which includes inspection before and after the construction. The food cost is similar percent of sales as 2019, in the alternative. The food cost and permit cost are deducted from the revenue, which are increased by 155 regardless of renovation with the additional sales of 84000 per year, hence leading to the gross profit of $79245. The additional operating cost incurred as a result of renovation would be new appliance cost, construction cost, furnishing and new signage cost, additional advertising cost of $450 and wages of additional 10 hours at $10.7 per hour. Additionally, the bank would finance $19500, which is 75% of the construction cost with the 5 years loan term, 12 payments per year and 6.75 percent interest rate, thus resulting in monthly installment of $384. After deducting the gross profit of $79245 from the operating expense of $38787; the net profit is calculated as $40458.

Leasing the location

Perry could grow the business operations to improve profitability by moving Edible Art Studio to a leased commercial space. She has selecteda suitable space, which includes included a former restaurant’s kitchen as well as small 160 square-foot storefront with its own entrance. The incremental revenues would be twice of the revenuesgenerated from renovation alternative. The annual rent expense of the alternative would be $9000 and wastage and spoilage cost would be $1325. The additional 20 hours would be required to work each month, leading to the cost of $214 per month. The advertisingbudget would be increased by $800 and the insurance premium would be $2780. The total operating cost of leasing is $23031 and the operating income is $211399.

Change in pricing structure

Perry is concerned about increasing the cupcakes’ pricefrom $2 to $2.25-2.5, in order to improve the business’ profitability. The cost of cupcake paper is $5 for 500 papers and pastry bag costs $31 for100 bags; whereas the cost of the raw materials, including: flour, sugar, icing sugar, shortening, egg whites, vanilla extract, butter extract and eggs are added. If the company would sell the products at the current price of $2 for 180 cupcakes; the revenue would be $6. If the company would sell the cupcakes at the modified price of $2.25 and $2.5 for 180 cupcakes, the revenue would be $10.5 and -$16.5, which shows that the feasible option would be to sell the cupcakes at 2.25 rather at 2.5.

Investment in advertising budget

The company could make an additional investment in the advertising budget. Previously, Perry has been promoting the products by posting pictures of cake at Facebook page, with no cost and pondered that Facebook advertising could be a meaningful promotional tool. Another advertising method includes: direct mail flyer, yellow page listing, bus shelter advertisement and Sarnia’s observer. The cost of direct mail flyers would be $650, yellow page listing would cost $285 and bus shelter advertisement would cost $380 per month. The additional cost of advertisement would lead towards an improved brand awareness and profitability.

Alternatives

Renovation of family home

Pros

The implementation of renovating the family home would take only 2 weeks, hence allowing Perry to start serving the customers soon.
It would lead towards an increased profitability of $40458, up from $20662 as a result of an increased sales of $700 per month.
Perry could finance the renovation by taking loan with monthly installment of $384, and her personal savings were sufficientenough to cover the additional investment of up to $20000.

Cons

The renovation of family home could incur an additional cost of $38787.

Leasing the location

Pros

It would allow the company to attract a wider customer base from home based business to commercial bakery.
The location offers more exposure to passers-by and expected walk-in-traffic and on the spot sales, which would lead towards incremental revenues twice as high as the sales projected for renovation.

Cons

It would require a considerable amount of money to commercialize the business.
The property is not secured due to which the bank is not willing to finance the project.

Changes in pricing structure

Pros

An increase in the price of cupcakes from $2 to $2.25, would result in profit of $10.5 for 180 cupcakes per week.
The high price of product would signal the high quality of product.

Cons

An increase in the price of cupcake might result in loss of customers as the customer might not be willing to pay high price.
The market players could bring out a lower priced product; taking away the market of EAS.

Investment in advertisement budget

Pros

It would lead towardslarger sales volume, improved brand awareness, easy sale of products, increased sales, enhanced goodwill and huge profits.
It would allow the company to reach a wider customer base.

Cons

It would incur additional cost on advertisement, which in turn would increase the cost of product.

Recommendation

In consideration of the issues discussed above; the company should pull in their expenses or expenditures and go with the leasing option and have an increasedinvestment in advertisement.The leasing would be feasible for the company as it has generated good amountas revenues and has been successful inattracting a wider customer base; it should expand its presence to grow the business. By limiting the business to family home would not allow the company to attract maximum customers in such acompetitive market. Also, the growing buyer preferences for the differentiatedproducts is one of the driving forces of change and success due to which it is necessary for EAS to innovate creative and new menu options, which would appeal to the target market. The marketing innovation holds significant importance in persuading orcompelling the customers to buy products. It should also increase its advertising or marketing budgetto reach a larger customer base and to maximize the market share. By leasing the location and increasing the advertising budget; the company would reach to a larger audience, which in turn would increasethe company’s sales. (Dawar, 2013).................................

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