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Minicase 5t Illllpage I Of Ieos Shfviuices Is A Juice Shop located in downtown Miami. The owner is considering the purchase of a new juicer to preserve her customer base in the market. The shop is experiencing increased difficulty in competing with juice chains such as Jamba Juice that offer customers a wider variety of specialty juices and mixes. The shop is open weekdays only. The cost of the new machine is $50,000.

The selling price of the new juice mixes will be $2.00 per cup, and the variable cost per cup is $0.50.

Paper For Above instruction

The decision to acquire new equipment is a critical strategic choice for small business owners, especially in competitive sectors like the fresh juice market. For the juice shop located in downtown Miami, the purchase of a new juicer at a cost of $50,000 warrants thorough financial analysis to determine its viability. The primary concern is whether the additional sales volume will cover the fixed investment, considering the current market challenges from larger chains offering diverse product options.

Break-Even Analysis: At the core of such decision-making is the calculation of the break-even point, which indicates the number of juice cups that must be sold daily to cover both the fixed and variable costs.

Given the selling price of $2.00 per cup and a variable cost of $0.50 per cup, the contribution margin per unit is $1.50 ($2.00 - $0.50). The total fixed costs include the $50,000 investment in the new machine. Since the shop operates only on weekdays, assuming a five-day workweek, the analysis should consider the number of days in a year—usually around 250 days for full-time operation.

To calculate the daily break-even sales volume, we divide the total fixed costs by the contribution margin per unit and then divide by the number of operating days:

Break-even units per day = Fixed Costs / (Price per unit - Variable Cost per unit) / Number of operating days

Estimate: 250 days/year; fixed costs = $50,000; contribution margin = $1.50.

Daily break-even sales volume = $50,000 / ($1.50 * 250) ≈ 133.33 cups per day.

Thus, the shop must sell approximately 134 cups daily to break even.

Impact of Increased Variable Costs on Break-Even Analysis

Further investigation reveals that the new machine requires substantial maintenance, which will increase the variable cost per cup by $0.50, raising it from $0.50 to $1.00. This change directly affects the contribution margin, reducing it from $1.50 to $1.00.

Re-evaluating the break-even point with the new variable cost:

Contribution margin = $2.00 - $1.00 = $1.00.

New daily break-even sales volume = $50,000 / ($1.00 * 250) = 200 cups per day.

Therefore, the shop would need to sell approximately 200 cups daily to cover the fixed costs under the increased variable costs, highlighting the importance of accurate cost estimation in investment decisions.

Other Factors to Consider Before Purchasing the New Machine

Beyond the straightforward financial calculations, the owner should evaluate several other important factors before deciding to purchase the new juicer. These include:

• Market Demand and Customer Preferences: The owner should assess whether the current customer base will expand or if current customers are willing to pay the increased prices or buy more to cover the costs.
• Competitive Landscape: Analysis of competitors' offerings, prices, and marketing strategies is crucial. If larger chains dominate the market with wider selections, the shop may need to innovate or differentiate its products to remain competitive.
• Operational Capabilities and Maintenance Costs: The increased maintenance costs and potential downtime may impact daily sales. The owner should evaluate the reliability of the new equipment and costs associated with repairs and maintenance.
• Financial Flexibility and Investment Return: The shop’s financial position should be considered, including cash flow and access to financing, to ensure the investment is manageable and offers a good return within an acceptable timeframe.
• Product Quality and Differentiation: The quality of the new juice mixes, the uniqueness of flavors, and health benefits could influence customer loyalty and willingness to pay premium prices.
• Operational Hours and Staffing: As the shop operates only on weekdays, consistency of customer flow during these days will impact sales volume and should influence the decision.
• Brand Image and Marketing: Effective marketing strategies can boost sales volume, making the investment more profitable.
• Regulatory and Safety Considerations: Ensuring compliance with health and safety regulations for new equipment is essential to avoid potential legal issues or operational disruptions.

Conclusively, while the financial analysis provides a clear baseline, a comprehensive evaluation combining customer insights, competitive positioning, operational costs, and strategic planning is imperative for making a well-informed investment decision that aligns with the long-term goals of the juice shop.

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