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Enchantment Bakery Financial Assignment
Enchantment Bakery Pty Ltd, trading as Enchantment Bakery, is a business that was started nearly 40 years ago by Mr. Kuan Chan.
Mr. Chan arrived in Australia in 1980 as a refugee from Cambodia. He quickly found work in a bakery and learned the techniques of bread and pastry making. At some stage, early in this employment, he tasted a doughnut made in the Australian style, and immediately he remembered the doughnuts he had eaten in Cambodia. Whilst he enjoyed the Australian doughnuts, he began to research how to make these doughnuts of his childhood, known as Nuom Kong[1]. His idea was that these doughnuts might be the nucleus of a business venture he could take on.
By 1984, Mr. Chan had started his own bakery in a small suburban shopping strip, selling Cambodian doughnuts as well as the usual products such as bread, pies, cakes, and pastries. His business was very successful, and he thought about setting up a chain of shops, but eventually decided the way to go was to set up a small wholesale business selling his goods to retail outlets such as small supermarkets. His business, Enchantment Bakery, started slowly with the range of goods being small, but the items produced were seen as of excellent quality and good value for money. In particular, there was a great demand for Cambodian doughnuts. By 1993, Enchantment Bakery was successful, with a wide variety of goods being sold to major supermarket chains and other participants in the Australian food services industry.
Now in 2022, Enchantment Bakery is very successful. In 2021, its revenue was in excess of $66 million, and its net profit was just under $8 million. Its baked goods can be found in supermarkets, retail stores, and coffee shops all over Australia.
Enchantment Bakery remains a family company. Mr. Chan has retired from active participation in the business, but his four children are all directors of the company. There are only six shareholders, being the four siblings Mr. Chan himself and Mrs. Chan, his wife. There are no other shareholders. For Enchantment Bakery, its board has six directors with the other two directors having been appointed for their expertise. The CEO and CFO of the company also attend Board meetings but are not directors of the company.
In 2016, after much planning, Enchantment Bakery set up a state-of-the-art factory in an industrial area in outer suburban Melbourne. Some of the factory space was set up as a coffee shop, selling beverages and snacks from the Enchantment Bakery range of products. This coffee shop, known as Nuom Kong Café, has proved to be popular with workers on the industrial estate.
Enchantment Bakery’s management and administration offices are located within the factory complex and Enchantment Bakery’s Board holds its meetings in this location. The philosophy of the company is that it is important for the success of the company that the decision-makers are close to all aspects of the business, especially its bakery operations.
In 2017, Enchantment Bakery tendered for and won a contract with Flyaway Airlines. The company now provides ‘snack boxes’ for morning and afternoon services on Flyaway flights around Australia. The contract with the airline is very demanding regarding the quality of goods and their presentation. The financial arrangements with Flyaway Airlines are quite different from the arrangements with their other customers.
It is March 2022, and Ms. Kim Long, the chief financial officer for Enchantment Bakery, is in the early stages of developing the master budget for Enchantment Bakery for the financial year 1 July 2022 to 30 June 2023.
At the same time, Mr. Simon Gill, the manager of Nuom Kong Café, is analysing actual and projected sales data for the café.
Projected operating income for Enchantment Bakery
The sales manager has provided the following projected sales information for Enchantment Bakery for the 4th quarter of the 2021/22 financial year and for the 2022/23 financial year. These figures have been reviewed by operational and marketing staff and are seen as realistic.
Enchantment Bakery derives its operating income from three sources. Firstly, it sells its bakery goods to retail food stores. Secondly, it sells snack packs to Flyaway Airlines, and finally, it obtains a small amount of income from a variety of other sales.
Projected sales to retail food stores
Enchantment Bakery sells only five product lines. The price for each product has just been reviewed and it is expected that these prices will not rise until after July 2023.
These product lines, the mode of selling, and the associated prices are:
Table 1: Product line and Selling Price
| Product line | Mode of selling | Selling price |
| Bread | Individual loaf | $2.25 |
| Pies | Pack of 5 | $10 |
| Cakes | Pack of 20 | $40 |
| Pastries | Pack of 20 | $35 |
| Doughnuts | Pack of 10 | $12.50 |
Thus, for example, pies are sold to retail food stores in packs of 5. Each pack of 5 pies sells for $10.
There is consistency in the mix of products that are sold to retail food stores. For every 100 loaves of bread that are sold, 4 packs of pies, 1 pack of cakes, 2 packs of pastries, and 2 packs of doughnuts are sold.
For Enchantment Bakery, there is consistency in the mix of products that are sold to retail stores. Of course, each retail store buys from Enchantment Bakery an assorted mix of products that it needs. However overall, Enchantment Bakery has observed a very close relationship between the mix of products sold. Taking all its sales into account, Enchantment Bakery has observed that for every 100 loaves of bread that its sells, it sells 4 packs of pies, 1 pack of cakes, 2 packs of pastries, and 2 packs of doughnuts.[2]
The sales manager has provided the following estimates of the number of units that will be sold to retail food stores for the next 15 months.
Table 2: No of units for Retail Sales
| 2021/2022 Financial Year | Total no. of units |
| Apr | 1,250,000 |
| May | 1,950,000 |
| Jun | 2,050,000 |
| 2022/2023 Financial Year | |
| Jul | 2,100,000 |
| Aug | 2,100,000 |
| Sep | 1,600,000 |
| Oct | 2,000,000 |
| Nov | 3,300,000 |
| Dec | 2,850,000 |
| Jan | 1,750,000 |
| Feb | 1,300,000 |
| Mar | 1,300,000 |
| Apr | 1,300,000 |
| May | 2,000,000 |
| Jun | 2,100,000 |
Projected sales to Flyaway Airlines
Enchantment Bakery has a contract with Flyaway Airlines to supply snack packs. Each pack contains some food items suitable for eating on a plane. Depending on the flight, the pack supplied to the airline customer will either be a ‘basic’ snack pack or a ‘deluxe’ snack pack.
Enchantment Bakery supplies the snack packs in cartons, with each carton holding 100 snack packs. Each carton contains only one type of snack pack i.e., there are cartons that hold 100 basic snack packs and there are cartons that hold 100 deluxe snack packs.
The sales price of the basic snack pack carton is presently $75, whilst the sales price of the deluxe snack pack carton is presently $105. However, the contract in place with Flyaway Airlines allows for price increases and as of 1 July 2022, these prices will rise to $80 and $110 respectively. There will be no further price rises until July 2023.
Flyaway purchases of snack packs have consistently been such that 30% of the purchases are for the basic snack packs and 70% are for the deluxe packs, The COO believes that this situation will continue.
The total number of cartons of snack packs that are expected to be sold per month to Flyway airlines in the time span April 2022 to June 2023 is set out below:
Table 3: No of Cartons for Airlines
| 2021/2022 Financial Year | Total no. of cartons |
| Apr | 14,500 |
| May | 12,000 |
| Jun | 14,500 |
| 2022/2023 Financial Year | |
| Jul | 14,750 |
| Aug | 12,400 |
| Sep | 15,000 |
| Oct | 15,250 |
| Nov | 12,750 |
| Dec | 30,500 |
| Jan | 24,750 |
| Feb | 12,250 |
| Mar | 20,000 |
| Apr | 15,000 |
| May | 12,250 |
| Jun | 15,000 |
Other operating income
Apart from income received from sales to retail food stores and from Flyaway Airlines, it is expected that $15,000 cash will be received each month in the 2022-2023 financial year from other operating income.
Revenue Collection
With regard to sales revenue from trade with retail food stores, it is expected that 30% will be collected one month after the sales are made, 50% will be collected in the second month, 18% in the third month and there will be 2% bad debts.
For Flyaway Airlines sales, it is expected that 100% of revenue will be collected but with a schedule. Flyaway Airlines makes payments to Enchantment Bakery according to the following schedule:
Table 4: Cash Collection from the Airlines
| Month of sales | Payment received from Flyaway Airlines |
| Jan – Mar | Jun |
| Apr-Jun | Sep |
| Jul-Sep | Dec |
| Oct-Dec | Mar |
Projected operating expenses for Enchantment Bakery
A major expense for Enchantment Bakery is supplies. Based on the projected number of bakery units to be sold to retail food stores and the projected number of cartons of snack boxes to be sold to Flyaway Airlines and the previous history of any other sales, the cost accountant has provided the following projected figures.
Table 5: Payment to Suppliers
| 2021/2022 Financial Year | $ |
| Apr | 2,900,000 |
| May | 3,000,000 |
| Jun | 3,000,000 |
| 2022/2023 Financial Year | $ |
| Jul | 3,000,000 |
| Aug | 2,600,000 |
| Sep | 3,100,000 |
| Oct | 4,400,000 |
| Nov | 4,900,000 |
| Dec | 3,400,000 |
| Jan | 2,100,000 |
| Feb | 2,600,000 |
| Mar | 2,300,000 |
| Apr | 3,000,000 |
| May | 3,200,000 |
| Jun | 3,200,000 |
Enchantment Bakery pays for supplies according to the following schedule: 10% is paid in the month of purchase, 50% is paid in the month after purchase, and 40% in the second month after purchase.
Another major expense is that of staff wages and associated staffing costs. These costs are expected to amount to $11,960,000 for the 2022/23 year. There are 26 fortnightly pay periods, with these costs being apportioned evenly per pay period. There will be 2 pay periods in each of the following months: July 2022, August 2022, October 2022, November 2022, December 2022, January 2023, February 2023, April 2023, May 2023, and June 2023, and 3 pay periods in September 2022 and March 2023.
Local Council rates of $500,000 will be paid in August 2022.
Given the nature of Enchantment Bakery, a major expense is insurance. The cost for this insurance is $720,000 for 2022/23, to be paid monthly, in advance. It is expected that the cost of this insurance will rise by 2.5% for the 23/24 financial year.
Utilities (gas, electricity, water, and communications) are also major expenses. These expenses are all paid in a regular pattern. Details are set out below.
Payments for gas need to be paid in August, November February, and May. For this financial year the following payments are projected:
Table 6: Gas Bills
| Month of payment | Gas
$ |
| Aug 2022 | 175,000 |
| Nov 2022 | 160,000 |
| Feb 2023 | 240,000 |
| May 2023 | 125,000 |
For electricity, payments are due in July, October, January, and April. The amounts expected to be paid are:
Table 7: Electricity Bills
| Month of payment | Electricity
$ |
| Jul 2022 | 250,000 |
| Oct 2022 | 240,000 |
| Jan 2023 | 340,000 |
| Apr 2023 | 200000 |
Payment for water is made six monthly with a payment of $110,000 expected in September 2022 and the next payment due in March 2023. This payment is expected to be for $115,000.
Communications costs are $25,000 per quarter. Enchantment Bakery has a fixed-price contract until December 2023 with BigT Comms. Payments are due in August, November, February, and May.
Taxation: Based on previous income taxation assessments, Enchantment Bakery will pay the Australia Taxation Office $650,000 in each of the months of September 2022, December 2022, March 2023, and June 2023
Other operational expenses such as those related to cold storage warehouses, packaging material, and fuel and maintenance for delivery vehicles are estimated to be $40,000 per month.
Governance expenses relating to directors’ fees and compliance costs are estimated to be $15,000 per month.
Enchantment Bakery – financial situation
As noted above, Enchantment Bakery has been a most successful organization, and one of the reasons for this success has been its prudent financial management. At present, i.e., March 2022, to provide for appropriate liquidity, its aim is to consistently hold between $5 million and $6 million as cash and cash equivalents. Its projected amount for cash and cash equivalents as of 30 June 2022 is $5.14 million.
With respect to debt carried by Enchantment Bakery, its capital structure is presently 67% equity and 33% debt, and its interest coverage ratio is 16.0. Comparable figures for similar businesses are a capital structure of 50% debt and 50% equity, and an interest coverage ratio of 3.5.
Each month in the 2022/2023 financial year Enchantment Bakery will pay $275,000 to service its debt. These payments cover both interest expenses and payment of borrowed funds.
Projected capital expenses for 2022/23 for Enchantment Bakery
As stated earlier, Enchantment Bakery set up a state-of-the-art factory in 2016. There is now a need for an update of the communications facilities both in the factory and in the co-located office areas. This activity can be done in stages to ensure the availability of key staff. It is planned that the work will take place in September and October 2022 and February and May 2023. The capital expenditure for each of these months is projected to be $250,000
Enchantment Bakery plans to diversify the business and intends to launch new products like health food, antioxidant candies, and many more. Some of the items are in the trial stage and Enchantment Bakery intends to launch them sometime in the financial year 2023-24. IF possible, Enchantment Bakery intends to install the necessary setup this year for the launch of these new products. While doing so, Enchantment Bakery plans to refurbish the existing setup at the same time.
It is planned that these capital works will take place in the months judged by the Chief Operating Officer to provide for the lowest disruption to operations, judged to be August, January, and April. The capital expenditure for each of these months is projected to be $600,000.
As well as the above capital expenditure, a budget of $125,000 per month will be provided for minor capital works.
Nuom Kong Café – business management
As mentioned earlier, in the thirty-eight years of its existence, Enchantment Bakery has shown itself to be a most successful business. One of the reasons for this success is that there has been excellent financial management of all aspects of its business. This exacting financial management has been applied to the Nuom Kong Café. Tight controls are in place regarding all financial aspects of the café. As part of this control, the manager of the café operates the café as though it is a separate business itself. The café has its own bank account. As part of annual budgeting for the café, projected financial statements for the café are prepared.
Enchantment Bakery Financial Assignment Help
As part of its operating expenses, the Nuom Kong Café pays rent to Enchantment Bakery Pty Ltd for the use of the space within the factory.
In 2021, the café décor was updated. Enchantment Bakery Pty Ltd provided a loan for this work. The café pays interest on this loan. However, at this stage, there is no requirement to pay back any of the capital borrowed.
Nuom Kong Café – actuals and projections
The Nuom Kong Café is open for business five days per week for 50 weeks of the year i.e. 250 days of the year. On each day of business, it is open from 7 am to 3 pm i.e. 8 hours. All sales are cash sales.
Sales can be divided into three types:
- A snack with a beverage – 70% of all customers
- A beverage only – 25% of all customers
- A snack only – 5% of all customers
The following revenue and cost information for the 2022/23 financial year has been developed (assume each customer makes only one purchase at each visit to the Nuom Kong Café).
Table 8: Selling Price and Cost Breakdown
| Type of purchase | Selling price | Cost of sale (all COS are variable costs) | Other variable costs per customer purchase |
| Snack and Beverage | $10.00 | $4.60 | $0.05 |
| Beverage only | $4.20 | $2.10 | $0.05 |
| Snack only | $5.80 | $2.20 | $0.05 |
The manager of the café has developed a projected income statement for the café., based on the expectation of 90,000 customers for the years. It is set out below.
Table 9: Projected Income Statement
| Nuom Kong Café | |||||
| Projected Income statement for 1/7/2022 to 30/06/2023 | |||||
| based on 90,000 customers for the year for the year | |||||
| Sales | $750,600 | ||||
| less: Variable Costs | -$351,450 | ||||
| less: Fixed costs | |||||
| Staffing costs | -$310,000 | ||||
| Cleaning costs | -$25,000 | ||||
| Marketing costs | -$3,600 | ||||
| Rental cost | -$18,000 | ||||
| Depreciation expense | -$2,400 | ||||
| Interest expense | -$1,050 | ||||
| Other fixed costs | -$2,400 | ||||
| Total fixed costs | -$362,450 | ||||
| Profit | $36,700 | ||||
Enchantment Bakery Financial Assignment Help
Part A
Three questions (with subparts) to be answered:
(While these questions are solved using MS-Excel, they must also be presented properly in a Word/Pdf document)
REQUIREMENTS:
- Prepare a monthly cash budget for Enchantment Bakery for the financial year 2022/23, based on the information provided above. You may use the layout presented in Table 10 (next page) to prepare the Cash Budget. Please note that you must add more entries and the necessary details needed to complete the Cash Budget.
- Cost-Volume-Profit Analysis
- Determine the breakeven point for both customers per year and for sales dollars per year for Nuom Kong Café.
- Calculate the margin of safety in the number of customers per year.
- What number of customers per year would be needed to achieve a profit of $50,000 (ignore any taxation)?
- The last hour of trading for Nuom Kong Café is often quite slow and the café manager has been developing a plan where a special deal would be offered to customers between 2 pm and 3 pm. The plan being considered at present is that a customer would be able to purchase a beverage and snack for just $7.00 during these hours. Market research has provided the following information:
Present situation:
The average number per day of customers for this hour i.e., 2 pm – 3 pm is 15. Of these customers 11 purchase a snack and beverage, and 4 purchase a beverage only.
Special deal situation:
The average number per day of customers for this hour i.e., 2 pm – 3 pm would be 25. Of these customers, 20 would purchase a snack and beverage, and 5 purchase a beverage only. Sales during the other hours of the café’s opening would not be impacted.
If the Café decides to pursue the proposal, what will be the impact on the yearly profit with Special Deal?
Note: for calculations, please show workings in your answer.
| Jul | Aug | Sep | Oct | Nov | Dec | Jan | Feb | Mar | Apr | May | Jun | Total | |
| Cash Inflows | |||||||||||||
| Retail Stores | |||||||||||||
| Airlines | |||||||||||||
| Other Income | |||||||||||||
| Total Cash Inflow | |||||||||||||
| Cash Outflows |
Table 10: Partially filled Cash Budget. You may use this format to complete the Cash Budget for Enchantment Bakery for the 12-month period Jul – 22 to Jun-23
[1] See this link to read about Cambodian doughnuts. https://boyeatsworld.com.au/noum-kong-cambodian-doughnuts/
[2] As an example, if Enchantment Bakery sells 20,000 units in a particular timeframe, it can be assumed that the mix of goods sold in that time frame is – 10,000 loaves of Bread, 400 packets of Pies, 100 packs of Cakes, 200 packs of Pastries, and 200 packs of Doughnuts. The income to the Bakery for this number of units sold would be $40,000.
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