Test bank and solution of better business 3e (2)

CHAPTER 2: ECONOMICS AND BANKING CHAPTER OPENER Chapter covers the fundamentals of economics ― how business decisions are shaped by supply and demand and the degrees of competition Students will learn how:  to interpret key economic indicators, such as the gross national product and price indexes  the government can step in to control business cycle swings through taxation, spending, and monetary policy  to understand the Federal Reserve, and how its actions influence the U.S money supply DETAILED LECTURE OUTLINE I The Basics of Economics A Economics Defined So what is economics? a Economics is the study of how individuals and businesses make decisions to best satisfy wants, needs and desires with limited resources b There are two basic studies of economics: microeconomics and macroeconomics i Microeconomics is the study of how individual businesses, households and consumers make decisions to allocate their limited resources in the exchange of goods and services ii Macroeconomics is the study of the behavior of the overall economy B Different Types of Economic Systems What are the different types of economic systems? a An economy is a system that tries to balance the available resources of a country against the wants and needs of consumers b The world’s different economies are classified into three basic economic systems: planned (or controlled) economies, market economies, and mixed economies i In a planned economic system, the government plays a significant role in determining the goods and services that are provided and how they are produced and distributed a.) Under communism, the government makes all economic decisions and controls all the social services and many of the major resources required for the production of goods and services b.) Socialism provides that the government owns or controls many basic businesses and services so that profits can be distributed evenly among the people c.) Many socialist and communist countries are beginning to change their economies into free market economies through privatization – the conversion of government-owned production and services to privately owned, profit-seeking enterprises ii In a market economy, individuals are able to make their own economic decisions Copyright © 2014 Pearson Education, Inc 2-1 a.) Capitalism is an economic system that allows freedom of choice and encourages private ownership of resources required to make and provide goods and services b.) The production and pricing of goods and services is determined through the operation of a market – the mechanism by which buyers and sellers exchange goods and services iii Most economic systems are mixed economies, which are a blend of market and planned economies C Business and Economics Why business managers need to be concerned with economics? a Businesses need to know how much of their goods to produce or services to offer, as well as how much to charge b They need to be aware of the potential impact that government decisions and the decisions of collective businesses can have on their individual business II Determining Price: Supply and Demand A Supply What is supply? a Supply refers to how much of a product or service is available b Supply is derived from a producer’s desire to maximize profits c The law of supply states that the amount supplied will increase as the price increases; if the price is lower, less of the product is supplied d A supply curve shows the relationship between supply and price B Demand What is demand? a Demand refers to how much people want to buy at any given time b The amount demanded increases as price declines c A demand curve illustrates the relationship between demand and price C Factors that Determine Price What factors determine price? a As a price increases, more product is likely to be supplied, but as the price decreases, more product is likely to be demanded by customers b If supply exceeds demand, there is a surplus c If demand exceeds supply, there is a shortage d The price at which supply equals demand is the market price or the equilibrium price D Factors That Shift Supply What makes supply change? a Determinants of supply include: i Technology Changes – Technology improvements enable suppliers to produce their goods or services more efficiently and with fewer costs ii Changes in Resource Prices – The price of resources used to produce a good or service affects the cost of production iii Price Expectations – These reflect the producer’s best guess at the future price of a product a.) If prices are expected to increase, the supplier may reduce supply now to supply more at a later time when prices are higher b.) If prices are expected to decrease, the supplier may attempt to deplete supplies now at the higher price Copyright © 2014 Pearson Education, Inc 2-2 iv Number of Suppliers – The supply of a good or service increases as the number of competitors increases v Price of Substitute Goods – If there are other equally comparable substitute goods available at a lower price, this affects the supply of goods b Changes in any of these factors shift the supply curve to the left (have a negative impact on supply) or to the right (have a positive impact on supply) E Factors That Affect Demand What factors affect demand? a Determinants of demand include: i Changes in Income Levels – When income levels increase, people are able to buy more products When income levels decrease, most people buy fewer products ii Population Changes – Increases in population create a greater demand iii Consumer Preferences – Demand for a product can change based on what is popular at any given moment iv Complementary Goods – Products or services that go with each other and are consumed together are considered complementary goods v Substitute Goods – Goods that can be used in place of other goods are substitute goods b A positive change in any of these determinants of demand shifts the demand curve to the right A negative change shifts the demand curve to the left III Degrees of Competition A Monopolies What is a monopoly? a A monopoly occurs when there is only one provider of a service or good and no substitutes exist Why aren’t there many monopolies? a In the United States, as well as in other countries, large monopolies are rarely allowed b Without competition, the monopoly supplier can charge a higher price and may be less responsive to consumer needs B Duopolies and Oligopolies What happens when one or two other companies enters a monopolistic market? a A duopoly is where only two suppliers exist, or only two firms have dominant control over a market b An oligopoly is a form of competition in which only a few sellers exist and each seller has a fairly large share of the market C Monopolistic competition What happens when there isn’t much differentiation between products? a Monopolistic competition occurs when there are many buyers and sellers and little differentiation between the products themselves, but there is a perceived difference among consumers D Perfect competition What happens when products are almost identical? a Perfect competition occurs when there are many buyers and sellers of products that are virtually identical and any seller can easily enter and exit the market b No single supplier can influence the price Copyright © 2014 Pearson Education, Inc 2-3 IV Economic Indicators A The Gross Domestic Product How we determine the health of an economy? a Economists primarily use three economic indicators to determine how well businesses are performing overall: the gross domestic product (GDP); consumer and producer price indices; and the unemployment rate b The gross domestic product (GDP) measures the overall market value of final goods and services produced in a country in a year What’s the difference between GNP and GDP? a The gross national product (GNP) attributes earnings to the country where the firm was owned, not where the product was manufactured How does the GDP act as an economic indicator? a When the GDP goes up, the indication is that the economy is in a positive state A downward-moving GDP indicates with problems with the economy because fewer goods are being produced B Consumer and Producer Price Indices What else is used to gauge the health of an economy? a The consumer price index (CPI) and producer price index (PPI) are used as economic indicators They measure purchasing power and determine the rate at which consumer and wholesale prices change i Inflation is a rise in the general level of prices over time ii A decrease in the rate of inflation is disinflation iii A continuous decrease in prices over time is deflation How are changes in the price of consumer products measured? a The CPI tracks changes in prices over time by measuring changes in prices of goods in services that consumers purchase b The CPI measures price changes by creating a “market basket” of a specific set of goods and services that represent the average buying pattern of urban households What goods and services are included in the CPI? a The expenditure items fall into major groups: housing, food and beverages, recreation, medical care, education and communication, transportation, and other goods and services (Figure 2.8) Does the CPI measure the change in price of all goods? a The CPI measures the change in prices of consumer goods only b The PPI tracks the average change in prices at the wholesale level i It tracks the prices of goods sellers use to create products, such as raw materials, product components that require further processing, and finished goods sold to retailers Why are price indices important? a The CPI and PPI are important because they measure purchasing power and consequently trigger business decisions C The Unemployment Rate What other indicators are used to measure the economy? a The unemployment rate measures the number of workers who are at least 16 years old, are not working, and who have been trying to find a job within the past four weeks and still haven't found one b There are different measurements of unemployment: Copyright © 2014 Pearson Education, Inc 2-4 i Frictional unemployment measures temporary unemployment in which workers move between jobs, careers, and locations ii Structural unemployment measures permanent unemployment associated when an industry changes and jobs are terminated completely iii Cyclical unemployment measures unemployment caused by a lack of demand for those who want to work iv Seasonal unemployment measures those out of work during the off-season Why is unemployment an important economic measure? a High unemployment results in an increase in unemployment benefits and government spending on social programs b If the unemployment drops too low, the concern is that more workers have increased buying power and spend more, causing prices to rise and increasing inflation D Productivity How is the productivity of the workforce measured? a Productivity measures the quantity of goods and services that human and physical resources can produce in a given time period Why is measuring productivity important to businesses? a An increase in productivity indicates that workers are producing more goods or services in the same amount of time, resulting in lower costs and lower prices V Government and the Economy A Economic Policies Why does the state of the economy change? a Over time, the economy naturally goes through periodic increases and decreases, called the business cycle There are four stages (Figure 2.9): i Peak occurs when the economy is at its most robust point ii Recession is a decline in the GDP for two or more successive quarters of a year A very severe or long recession is a depression iii A trough occurs when the recession hits bottom and the economy begins to expand again iv Expansion or recovery refers to the phase when the economy begins to grow after a recession or depression How does the government control swings in the business cycle? a To smooth out the swings in the business cycle, the government influences the economy through its fiscal policy and monetary policy b With fiscal policy, the government determines the appropriate level of taxes and spending c With monetary policy, the government manages the supply of money B Fiscal Policy Why does the government increase taxes to influence the economy? a Increases in taxes are used to offset rising inflation, because higher taxes translate into less consumer spending, which in turn slows down the growth of businesses and the economy How does government spending help stimulate the economy? a Decreasing taxes does not have the opposite effect on the economy Instead, to stimulate the economy, the government uses another form of fiscal policy: government spending b Government spending increases cash flow to the economy faster than decreasing taxes because it is an immediate injection of funds into the system Copyright © 2014 Pearson Education, Inc 2-5 C Monetary Policy What else can be done to control the economy? a The second tool to manage the economy is monetary policy b The Federal Reserve System (the Fed) is the central banking system of the United States i It includes 12 regional Federal Reserve Banks, a Board of Governors, and the Federal Open Market Committee (FOMC), which sets the policies of the Fed, including monetary policy What is the money supply? a Through its monetary policy, the Fed affects the nation’s money supply – the combined amount of money available within an economy b There are different components to the money supply: i M-1: Coins and bills (currency), traveler’s checks, and checking accounts ii M-2: M-1 plus savings deposits, money market accounts and certificates of deposit iii M-3: M-1, M-2 and less liquid funds such as larger CDs, money market accounts, and U.S dollars deposited in banks outside the U.S Why is the money supply important? a Money has a direct effect on the economy because an expanding money supply may result in inflation However, a limited money supply can result in either disinflation or deflation b The Fed uses three tools to affect money supply: reserve requirements, short-term interest rates, and open market operations D Reserve Requirements What are reserve requirements? a The reserve requirement, determined by the Fed, is the minimum amount of money banks must hold in reserve to cover deposits b The Fed can ease or tighten the money supply by increasing or decreasing the reserve requirement E Short-Term Interest Rates What is the discount rate? a When commercial banks borrow funds from the Fed, they are charged an interest rate called the discount rate b The Fed has the power to increase or decrease the discount rate in its efforts to control money supply Is the discount rate the same as the Fed Funds rate? a The Fed Funds rate is the interest rate that banks charge other banks when they borrow funds overnight from one another F Open Market Operations What are open market operations? a The primary tools the Fed uses in its monetary policy is open market operations, buying and selling U.S Treasury and federal agency bonds on the “open market” b When the Fed buys or sells U.S securities, it is changing the level of monetary reserves in the banking system by adding or taking away money from the system NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture This will allow you to know what might need to be reviewed during the next lecture Copyright © 2014 Pearson Education, Inc 2-6 SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity Comparing Economic Systems Activity Overview: This activity gets students talking about how similar and different the U.S economic system is to other systems Time Limit: 30 minutes What to Do: Divide the class into small groups Ask the groups to assume they have just overheard a classmate say, “The United States is becoming more socialist every day—with all the government control.” Have each group list reasons why the statement could be true and reasons why the statement could be false (15 minutes) Reassemble the class and discuss each group’s thoughts (15 minutes) Don’t Forget: Remind students that a government’s level of control distinguishes capitalism from socialism If you have foreign students in your class, you may want them to say a bit about the economic system in their native country Wrap-Up: Wrap up the discussion by reminding students that the U.S economic system and a socialist system have certain similarities and many differences For example, workers in socialist economies often work fewer hours, have longer vacations, and receive more health, education, and child-care benefits than workers in capitalist economies On the other hand, the federal government does control some basic services in the United States as well as various aspects of the market through agencies, such as the Food and Drug Administration (FDA) and The Federal Communication Commission (FCC) Supplemental Homework Activity Let’s Go Shopping! Homework Assignment: Visit a local shopping mall or shopping area List each store that you see and determine what degree of competition it faces in its immediate environment For example, if there is only one store in the mall that sells shoes, that store represents a monopoly Note those businesses with direct competitors (e.g two jewelry stores) and show how they compete with one another Deliverable: A brief paper reporting on degrees of competition and the tactics stores use to compete with each other Answers will vary, but students should recognize different levels of competition and how stores respond to competition by advertising, reducing prices, etc At-Home Completion Time: to hours Copyright © 2014 Pearson Education, Inc 2-7 ENHANCING THE ONLINE COURSE Online Lecture: Define the terms “microeconomics” and “macroeconomics” and use examples to distinguish between the two disciplines Video tape yourself giving the short “mini-lecture” Many institutions have video cameras for your use in the library or you can use a digital camera with the help of another professor Load the short video online (using procedures as specified by your online platform) Have your students watch the short video and a quiz afterward Economics Model Search: Ask students to search the Internet to illustrate each of the boxes in Table 2.1 Require students to develop and send in a table with graphics and examples in each of the cells to illustrate the differences between the systems of economics Create a Model: Ask your students to use photos or other graphics to show the relationship of supply and demand Limit the written discussion (in words) to one page to be emailed back to the discussion board Ask the students to relate the content of their responses to current events posted on the Internet Price Points: Require your students to check the prices of products for weeks in a row (Suggested products: bread, eggs, chicken, tomatoes, milk, oranges, coffee, potato chips, and gasoline) What could account for the changes in price? Ask your students to report back on the findings of their “study”, to analyze the price differences, and, using the information in the text, to develop some ideas about what has caused the price differences Students can post the reports via the discussion board Copyright © 2014 Pearson Education, Inc 2-8 ANSWERS TO END OF CHAPTER MATERIALS Self Test Multiple Choice a c a b b c True/False True False False True False b a d 10 c Critical Thinking Questions: Suggested Answers Answers will vary depending on the phase of the business cycle currently underway Although economic indicators are closely watched by many people, the driving force behind changes in these indicators is the amount of overall demand, or total spending, on products If total spending (the demand for products) rises, then businesses will produce more products to satisfy this increase in demand More production generates a greater demand for workers and pushes the unemployment rate down A greater percentage of the labor force employed translates into a higher overall income level for households This usually means that more people will be out shopping Increased spending generates still more sales, more production, more jobs and more income to spend This is what happens during an expansionary phase of the business cycle On the other hand, a decrease in total spending in the national economy results in fewer business sales Businesses respond by cutting back on production and laying off workers Then, the unemployment rate rises As unemployment rises, people have less income to spend Spending and sales fall Businesses produce less, and production falls further, generating still more unemployment and less income to spend, etc This is what happens during a recession Economic indicators try to forecast changes in total spending in an economy in an attempt to forecast changes in the business cycle Monopolies are situations in which there is basically a single seller of the good or service, with no close substitutes for that product Without competition, the monopoly supplier can charge a higher price and may be less responsive to consumer needs The NFL (National Football League) and the MLB (Major League Baseball) can be seen as “unofficial” monopolies; for instance, a jury found for a fledging football league, the USFL, stating that the NFL had violated anti-trust laws and made itself a monopoly Interestingly, the NFL wants to be protected from antitrust suits because it claims that teams act – in business – as a single entity Although GDP is often used to indicate the economic well-being of a country, it really measures only how much we spend and, therefore, produce It doesn’t really indicate the well-being of a society or economy It’s a subtle distinction, but critics point out the GDP includes expenditures that address some of the negative aspects of the economy, such as cleaning up the environment Copyright © 2014 Pearson Education, Inc 2-9 after a bad oil spill, the costs associated with fighting crime, or treating illnesses associated with smoking These expenditures increase GDP and we may be better off because of them On the other hand, the GDP does not include the economic activity associated with goods produced at home but not sold (i.e., cooking, gardening, crafts), the sale of used goods, or charitable donations and volunteerism A case in point is Hurricane Katrina in 2005 Oddly enough, if we factor in the increases in the construction, equipment, service, and industrial supply industries used to rebuild New Orleans and the other regions severely damaged by the hurricane, the disaster will end up having a positive impact on the nation’s GDP, even though the well-being of that region has been negatively impacted In addition, we not factor in the massive amounts of donations of money, supplies and volunteer time directed to the region The positive impact of the volunteer efforts, the significant amounts of donations and grants attributed to Hurricane Katrina and other disasters not show up in the GDP and not reflect the activity of our society, since these volunteer and donated activities not produce a final good or service to be purchased Since these variations are difficult to measure domestically, and to compare internationally, the current method of computing GDP is adequate — a solid economic measure Team Time The Great Debate Answers will vary However, the point of the exercise is to help students understand the process of monetary regulation and to discuss who has a right to regulate how money flows in the U.S economy Ethics and Corporate Social Responsibility Economic Inequality Answers will vary However, be sure to have students consider how the type of economy in which they are currently living (capitalism) influences their answers to this question Would students living in a planned economy, such as communism or socialism, answer the questions in the same way? Copyright © 2014 Pearson Education, Inc 2-10 environmental policy and recycle whatever we can, and sponsor events to promote healthy lifestyles Copyright © 2014 Pearson Education, Inc MC2-23 INDUSTRY PROFILE INDUSTRY DESCRIPTION The Restaurant sector is in the Services industry There are many types of restaurants fighting for the same potential customer base Fast food giants, smaller take-out places, to more sophisticated high-end restaurants are all part of the Restaurant sector Additionally, cafes, tearooms, and restaurants with ethnic themes such as Italian, Mexican, Chinese, and Thai are all potential threats to our customer base The Vault Grill sees itself positioned in the middle—offering quality meals in a sit-down environment at an affordable price There are very few restaurants in the local region that fall into this type of category OPPORTUNITIES AND THREATS Mainland is a vibrant community that has attracted a variety of businesses, and is also the home of Newburg College While a declining economy may deter some individuals from spending money eating out, since The Vault Grill charges reasonable prices and caters to businesses, the potential negative impact of a bad economy is reduced The opportunity exists to expand our current customer base beyond the business and college crowd in Mainland In addition to economic strains, other possible threats include severe weather in areas that supply the produce, which could affect the availability or price of produce Similarly, an issue affecting the quality or availability of meat, fish, or poultry (such as mad-cow disease and mercury in fish) is another possible threat Non-smoking restrictions have been put in place for all restaurants in the county Since this restriction has been made prior to our opening, we not believe this will have any impact on our business COMPANY PROFILE AND STRATEGY BUSINESS GOALS First-year business goals: To break even To build a strong customer base To minimize employee turnover Intermediate to long-term business goals: To begin a carry-out and catering service within three years To earn net profits of $500,000 within five years Copyright © 2014 Pearson Education, Inc MC2-24 COMPANY STRENGTHS Foremost, we have a highly motivated management team with expertise in the restaurant business from a management and business perspective In addition, the chef is an award-winning specialist who has been responsible for grilled food preparation for over 15 years Our business is community-oriented and intends to ensure that we meet the dining and entertainment needs of our customers Copyright © 2014 Pearson Education, Inc MC2-25 RAW MATERIALS AND SUPPLIES The Vault Grill will need the following initial inventory Prices listed reflect new equipment and furniture We are looking for used equipment and furniture to help reduce overall costs 15 Tables @ $350 each $5,250 60 Chairs @ $100 each 6,000 15 Barstools @ $150 each .2,250 Cash Registers @ $225 each 450 Squirrel POS System .1,500 Char-Grill Oven Unit 1,000 Viking 8-Burner Stove 3,500 Microwave Ovens @ $150 each 450 Deep Fryer 2,500 Refrigeration Unit 2,000 Freezer 4,000 Ice Maker 1,000 Dishwashing Unit 2,000 Prep-Tables @ $200 each .600 Table Linens and Napkins 500 100 Small Glasses @ $1.00 each .100 100 Large Glasses @ $1.25 each 125 60 Wine tumblers @ $2.00 each 1,200 100 Sets Plates, Bowls, Mugs @$10.00 each .1,000 100 Sets Silverware @ $12 per set 1,200 Miscellaneous Kitchen and Bar Supplies 2,000 Table and Restaurant Decorations 1,375 Total $40,000 In addition to the above, we anticipate renovation costs of approximately $200,000 to convert the existing bank to a restaurant and kitchen facility We will need to stock our bar with liquor, wine, and beer and our pantry with basic cooking staples such as canned products, spices, and condiments We anticipate initial bar and food stocking costs to be approximately $8,000 Most of our bread and dessert offerings will be made fresh on site All other food items will be purchased from local Copyright © 2014 Pearson Education, Inc MC2-26 distributors on a weekly basis Local in-season produce will be used as much as possible Our inventories will not be significantly affected by change in seasons or holidays We plan to be open from 11 a.m to 10 p.m., Monday through Thursday, 11 a.m to midnight Friday and Saturday We will be closed on Sundays, Thanksgiving, Christmas, and New Years ANTICIPATED CHALLENGES AND PLANNED RESPONSES ANTICIPATED CHALLENGES We have two major anticipated challenges: We must obtain sufficient funds to start the venture There is a rumored opening of a steakhouse chain restaurant in a new mall opening up just outside the Mainland border PLANNED RESPONSES We plan to respond to these two major anticipated challenges as follows: The three initial partners are planning to personally contribute nearly half the anticipated funds needed to start the venture In addition, we have made contact with a restaurant that is upgrading its furnishings and equipment We anticipate that we can purchase many of the furnishings and kitchen equipment that they are replacing, thus driving down the level of our initial funding requirements While the rumored opening of the steakhouse chain may initially hurt us, we are confident that we can win over customers with our signature grilled-preparation, customer-focused service, reasonably priced menu, and proximity to local businesses and the college THE MANAGEMENT TEAM MANAGEMENT There is one level of management in the restaurant, with three different types of managers as follows:  Floor Manager  Grill Manager  Accounting Manager All managers are also co-owners Copyright © 2014 Pearson Education, Inc MC2-27 ORGANIZATIONAL CHART The organizational chart for The Vault Bar and GrillCafé is quite simple given that it contains only one level of management As the business grows, further levels of management and more employees may need to be added Owner/ Floor Manager Servers Bartenders Hosts Copyright © 2014 Pearson Education, Inc Owner/ Grill Manager Owner/Business Manager Cooks Dishwashers Bussers MC2-28 PART MARKETING MARKET ANALYSIS MARKET RESEARCH The Vault Grill will have two markets The first target market is the businessmen and women who work in Mainland and surrounding areas These individuals are college educated, in their 30s, 40s, 50s, and 60s, middle class, and will be looking for quick, reasonably priced lunches in a nice atmosphere in which to entertain business associates and clients We also anticipate that younger professionals in their 20s and early 30s will be looking for a fun, casual, and reasonable place to meet after work for dinner or a few drinks The second target market is the college community While we not expect that many of our regular customers will be students, we anticipate that faculty members, administrators, parents of students, and some students on special occasions will frequent The Vault Grill The demographics of this second target market vary quite widely but are held together by their connection to the college The second target market will be more seasonal in nature, as the college year runs primarily from September through May ASSESSMENT OF THE COMPETITION Several competitors exist in the area, ranging from the fast food giants of McDonalds and Burger King to other smaller take-out convenience places to more sophisticated high-end restaurants There are also a handful of cafes and tearooms, and a few ethnic restaurants The Vault Grill sees itself positioned in the middle—offering quality meals in a sit-down environment at an affordable price There are very few restaurants in the local region that fall into this type of category Specifically, there is the Mainland Diner, Winston’s, and The Country Restaurant THE PRODUCT OR SERVICE PRODUCT FEATURES AND BENEFITS The Vault Grill’s featured menu item will be its grilled entrées Our grill master has several special rubs and sauces that offer a unique flavor to any meat or fish entrée Customers can select how they would like their entrée prepared by selecting a dry rub or sauce of varying spiciness For those who are not fans of grilled meat, poultry, and fish, we will offer other methods of preparation, pasta dishes, and meal-portioned salads Another signature product will be our warm breads and creamy flavored butters placed at each table after diners are seated We will strive to Copyright © 2014 Pearson Education, Inc MC2-29 present a total product offer that includes warm and friendly service, a delicious, reasonably priced meal, and a relaxing ambience Copyright © 2014 Pearson Education, Inc MC2-30 PRODUCT DIFFERENTIATION People have many choices when it comes to dining out We know that we have to offer a product that stands out from the competition We will have two major differences from our local competitors The first is the grilled preparation of our food as well as the fresh, high-quality produce and bakery goods Diners will place the highest importance on the meal itself, and so will we However, the food is only part of the dining experience We will pay close attention to ensure our wait staff is well trained, customer focused, clean, and friendly The details of customer service from attire and grooming to efficiency and friendliness will constantly be monitored Finally, since a significant part of our business will be coming from serving business lunches, we will strive to ensure our customers with time constraints receive extra quick and attentive service PRICING Our pricing strategy is fairly simple We plan to position our menu offerings and their prices to reflect our quality products but not too high to give the impression that we are a higher-end restaurant Although we will have opening week specials, we will not pursue penetration pricing or price skimming as we not wish to cause discontent among customers when we inevitably raise our prices to secure a profit later SALES AND PROMOTION PLACE (DISTRIBUTION) ISSUES Mainland, with its business and collegiate communities, offers the type of customer base we are seeking We foresee no distribution issues In the future, we hope to expand The Vault Grill services to offer catering and take-out ADVERTISING Although we have two target markets, we will have primarily one advertising approach to attract both business and collegiate customers initially, but will rely on word of mouth recommendations as our best ongoing advertising strategy Initially, we plan to distribute brochures with sample menus to all local businesses and to college faculty and administration These advertisements will include coupons for discounts on our lunch menu Coupons will also allow us to track the success of the advertising We will also be listed in the local phone book and will have a small site on the Internet In opening week, we will run ads in the local newspaper and college newspaper to advertise our presence Copyright © 2014 Pearson Education, Inc MC2-31 These ideas are fairly inexpensive ways to get our message out to our target markets Copyright © 2014 Pearson Education, Inc MC2-32 PROMOTION We will have several opening week and ongoing promotions During opening week, we will feature buy one get one free lunches and a free appetizer with purchase of two entrees after pm These specials will last only opening week and will seek to generate initial foot traffic in the restaurant We will also have several ongoing promotions At lunchtime, when many customers are under pressure to return to their office within an hour, we will guarantee meals will be served within 20 minutes of ordering or customers get their lunch free Similarly, to entice those who might stop in for a drink after work to stay for dinner, we will be offering discounts on meals ordered prior to 6:00 Finally, for college students who might need an evening break, we will offer half-priced appetizers after pm on Monday through Thursday nights We will also have promotions during the fall, when Mainland has its street festival This festival attracts visitors from outside our community These promotions will build attention (and word of mouth) from those who live in Mainland, as well as nearby towns Copyright © 2014 Pearson Education, Inc MC2-33 PART 4: THE FINANCIALS EXPECTED REVENUE We believe that we can average 100 customers per day, with approximately 65 at the lunch hour and 35 at dinner We believe that the average lunch bill will be approximately $8.50 per customer, and that the average dinner bill will be approximately $17.50 per customer This will provide our restaurant with revenues of approximately $550 at lunch and $600 at dinner for total average daily revenue of $1,150 Although The Vault Grill will experience different traffic and therefore revenues for each day of the week, this will lead to yearly food revenues of approximately $345,000 Additionally, we believe we will average 50 customers a day at the bar, Monday through Thursday, with an average bar bill of approximately $4 per person On Fridays and Saturdays, we expect more bar customers who will also stay longer at the bar Therefore, we expect about 100 bar customers a day on Fridays with an average bar bill of approximately $10 per person, and 75 bar customers a day on Saturdays with an average bar bill of approximately $10 per person We anticipate bar revenues of approximately $122,400 Total bar and food revenue is anticipated to be approximately $467,400 per year We plan to be closed on Sundays, Christmas, New Years, and Thanksgiving COST OF DOING BUSINESS Expenses Rent Expected Monthly Cost Expected Yearly Cost 1,500 18,000 10,000 120,000 Supplies 500 6,000 Advertising and Other Promotions 250 3,000 Utilities: Heat, Electricity, etc 800 9,600 Utilities: Telephone and Internet 100 1,200 Insurance 1,650 7800 Total 14,800 165,600 Salaries and Wages Copyright © 2014 Pearson Education, Inc MC2-34 STARTUP COSTS We anticipate needing $200,000 for building renovation, $35,000 for decorations, furnishings, and equipment and supplies for the kitchen and bar, and $8,000 for initial stocking costs bringing our startup costs to total $243,000 FINANCING The three managers will each put a total of $25,000 into the startup of this business The remaining $168,000 is the amount that we are requesting for bank financing Copyright © 2014 Pearson Education, Inc MC2-35 12-Month Income Statement The Vault Grill January February March April May June July August September October November December YEARLY 2012 Food Sales 28,750 28,750 28,750 28,750 28,750 28,750 28,750 28,750 28,750 28,750 28,750 28,750 345,000 Bar Sales 10,200 10,200 10,200 10,200 10,200 10,200 10,200 10,200 10,200 10,200 10,200 10,200 122,400 Total Revenue (Sales) 38,950 38,950 38,950 38,950 38,950 38,950 38,950 38,950 38,950 38,950 38,950 38,950 467,400 Food Purchases 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 96,000 Alcohol Purchases 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 24,000 Total Cost of Goods Sold 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 120,000 Gross Profit 28,950 28,950 28,950 28,950 28,950 28,950 28,950 28,950 28,950 28,950 28,950 28,950 347,400 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 18,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 120,000 Supplies Expense 500 500 500 500 500 500 500 500 500 500 500 500 6,000 Advertising Expense 250 250 250 250 250 250 250 250 250 250 250 250 3,000 Utilities Expense 800 800 800 800 800 800 800 800 800 800 800 800 9,600 Telephone/Internet Expense 100 100 100 100 100 100 100 100 100 100 100 100 1,200 Insurance Expense 1,650 1,650 1,650 1,650 1,650 1,650 1,650 1,650 1,650 1,650 1,650 1,650 19,800 Interest from Loans (if applicable) 1050 1050 1050 1050 1050 1050 1050 1050 1050 1050 1050 1050 12,600 100 100 100 100 100 100 100 100 100 100 100 100 1,200 Total Expenses 15,950 15,950 15,950 15,950 15,950 15,950 15,950 15,950 15,950 15,950 15,950 15,950 191,400 Net Profit 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 156,000 Revenue (Sales) Cost of Goods Sold Operating Expenses Rent Expense Salary/Wage Expense Breakage Replacement Copyright © 2014 Pearson Education, Inc MC2-36 Balance Sheet As of June 2012 Assets Current Assets Cash in Bank $100,000 Inventory $8,000 Prepaid Expenses (6-mo insurance) $8,600 Total Current Assets $116,600 Fixed Assets Machinery & Equipment $19,000 Furniture & Fixtures $21,000 Real Estate / Buildings Total Fixed Assets Total Assets $40,000 $156,600 Liabilities & Net Worth Current Liabilities Accounts Payable Taxes Payable Notes Payable (due within 12 months) Total Current Liabilities $3,000 $10,000 $1,000 $14,000 Long-Term Liabilities Bank Loans Payable (greater than 12 months) $125,000 Less: Short-Term Portion Total Long-Term Liabilities $125,000 Total Liabilities $139,000 Owners' Equity (Net Worth) $17,600 Total Liabilities & Net Worth $156,600 Copyright © 2014 Pearson Education, Inc MC2-37 ... own personal business plan and determine if your goals and objectives match those of the business that you’ve imagined II Components of a Business Plan A The Cover Sheet and Table of Contents... financial needs of your business Exercise Background: Part of the Business Plan This part of the business plan asks you to consider the costs of doing business, such as salaries, rent, and utilities... create your final Business Plan Completing Part 2: The Company and Management Team In Part of the Business Plan project, you formulated the story of your business Part of the Business Plan project