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To: Members of the Board of Education Superintendent Randall Clegg From: Dave Helke BHS Principal Date: August 6, 2009 RE: Approve creation of a café at the Diamondhead Education Center RECOMMENDATION: THAT THE BOARD OF EDUCATION APPROVE THE CREATION OF A CAFÉ AT DIAMONDHEAD EDUCATION CENTER TO BE OPERATED AS A STUDENT ENTERPRISE WITH START-UP COSTS COVERED INITIALLY THROUGH EXISTING BURNSVILLE HIGH SCHOOL UNALLOCATED BUDGET FUNDS. Diamondhead Education Center (DEC) currently houses the Burnsville High School Senior Campus, Early Childhood Special Education, and Community Education programs. There is currently no food or beverage options available to staff and participants in these programs beyond vending machines. The usage of the building in the past has not necessitated the need for anything more. However, with the change in the senior campus schedule for 2009-10, and, an increased focus on creating a postsecondary culture for seniors, it is necessary to provide students with a limited food and beverage option onsite as a choice. This will alleviate potential congestion at the main campus cafeteria and local establishments. Additionally, partnerships with local colleges continue to be developed and there is increasing usage of the Senior Campus in the evenings. Currently, Concordia, Dakota County Technical College, Inver Hills Community College, and St. Mary’s offer classes on site with the possibility of Dunwoody, Normandale, and St. Thomas doing so in the future. The addition of an onsite café would be a value-added feature for the location being an educational center in the community. After starting up and establishing the operation, this café would become an authentic learning lab for the high school business department with students becoming directly involved in all aspects of its operation, including marketing, inventorying, and accounting. Since this will be a student enterprise, a formal student organization will be formed responsible for all decision-making and planning, with revenue and expenses being handled through existing student activity account procedures. It will also be promoted as a place to meet and study after hours, have club or organization meetings, and host special events, such as book signings, improv, etc. as a small staging platform would be added. Finally, the plan is to have wireless Internet access available. POTENTIAL USERS On any given school day, there are approximately 650 seniors attending the Senior Campus in either the morning or afternoon. There are also approximately 75 college students attending in the evenings, approximately 600 adults participating in or bringing their children to community education programs, and greater than 100 district staff working at DEC. The total number of potential users would be 1,425 on any given day. LOCATION AND START-UP COSTS The current Senior Campus lounge and adjacent storage space provides a location suitable for a café providing limited food and beverage choices. A floor plan is attached to this recommendation. In addition, Gene Roczniak and Tom Umhoefer have met with the health department and all remodeling, furnishing, and equipment costs associated with this recommendation meet licensing requirements. The total cost of this recommendation is expected to be in the range of $15,000 - $20,000. An itemized list of costs is below. Plumbing $8,000 Electrical $2,500 Refrigerator (storage) $500 Serving Counter $500 (addition of stainless legs to existing cabinets) Table Tops $250 (use existing bases and chairs in storage) Deli Case $3,145 Worktable/Sinks $2,300 Floor, wall surface, ceiling $1,000 (necessary in food prep and serving area to meet regulations) Licensing $350 TOTAL $18,545 Depreciation is not included as a fixed cost – these costs are being absorbed by the Districts’ general fund. HOURS OF OPERATION AND STAFFING The proposed maximum hours of operation for this café would be 6:30 am – 7:00 pm MondayThursday and 6:30 am – 2:00 pm on Fridays. This would require 67.5 hours of staffing, including shift overlaps. Senior citizens participating in the Senior Community Service Employment Program (SCSEP), funded under Title V of the Older Americans Act, can fill 22 hours, leaving 45.5 hours paid at the $9.25 per hour rate (plus FICA taxes of 7.65%) from the Community Education work agreement. There is no cost to the school district for the 22 hours worked by seniors. The Café will be open year-around (52 weeks per year) Sample work schedule: 6:30 am – 12:00 noon M - Thur 5.5 22 hrs. per week 10:00 am – 3:00 pm M - Thur 5 (seniors /no cost) 20 hrs. per week 2:45 pm – 7:00 pm M - Thur 4.25 17 hrs. per week 59 hours 6:30 am – 12:00 Friday 5.5 5.5 hrs. per week 11:00 am – 2:00 pm Friday 4 (seniors /no cost) 3 hrs. per week 8.5 hours VENDORS Pepsi-cola, Inc. would provide beverage cases and drinks. Lancer Catering, provider of meals for community education programs, would provide pre-packaged food items, including sandwiches and salads. Berry Coffee Company would provide the coffee and it is the Caribou product under the Caribou name. The possibility to work with local food establishments to sell their products on specified days also exists. Food and beverage selection would include bottled water, bottled juices, teas, pop (after school hours only), coffee, fruit, string cheese, yogurt, muffins, and pre-packaged sandwiches and salads made by the caterer. REVENUE AND EXPENDITURE PROJECTIONS It is difficult to predict actual revenues and expenditures as this is a new venture. Mark-ups consistent with the market will be as follows: $.90 per beverage, $.38 per sandwich. $.51 per salad, and $.26 per snack. The sales price on beverages would be $1.50, salads would be approximately $4.30, sandwiches would be approximately $5.15, and snack items would average approximately $1.12. Daily average sales are expected to be as follows: 70 beverages @ $1.50, 15 sandwiches and 15 salads @ $5.15 and $4.30, respectively, and 30 snack items @ $1.12. CONTINGENCY PLAN FOR OPERATION Since this is being operated as a student enterprise, all revenue and expenditure transactions are through the student activity fund, not the district general fund. However, with the start of any new service in which revenue is expected to provide continual coverage of expenses, it is important to define a contingency plan to address the potential circumstance that revenues are not covering expenses. The revenue and expenditures for this operation will be monitored closely by both Tom Umhoefer and Gene Roczniak with the goal that no existing funds incur liabilities. If expenditures are exceeding revenues, the following actions are available to take. 1) Adjustment of daily operations to provide service only during peak times. 2) Maintain inventory and sell only items with high demand. 3) Provide formal training to a select group of business students who would be interested in volunteering their time to work in the café. 4) Analyze mark-ups and compare to average market mark-ups and adjust accordingly. 5) Focus marketing efforts on identifying the wants of the consumer base, making adjustments accordingly. Any additional revenue above inventory and operation costs will be used to payback starting costs and fund future additions or enhancements. Required: Part I: 1. Based upon expected daily sales, what is the amount of weekly profit (loss) that the Café can expect to make? Ignore depreciation. 2. What is the weekly break-even sales volume & sales revenue, by product? Again, ignore depreciation. 3. If the Café wanted to generate weekly profits of $500, what is the weekly sales volume & sales revenue that they would need to achieve? Again, ignore depreciation. Part II: Assuming the up-front capital costs are to be depreciated utilizing the straight-line method of depreciation over 10 years with no salvage value, and that depreciation is included as a fixed costs, please calculate the following: 4. Based upon expected daily sales, what is the amount of weekly profit (loss) that the Café can expect to make? 5. What is the weekly break-even sales volume & sales revenue, by product? 6. If the Café wanted to generate weekly profits of $500, what is the weekly sales volume & sales revenue that they would need to achieve? Accounting Part 2 Slaughter House Five, Inc. operates several feedlots, one of which is located in Tombstone. The Tombstone feedlot no longer produces a profit because of its distance from sources of feed, relatively high transportation costs, and a lack of modern facilities. As a result, management is considering the possibility of constructing a new feedlot in Tumbleweed to replace the Tombstone lot. The new feedlot would be close to a feed source and near meat packers. If the Tumbleweed lot were to be built, the Tombstone lot would be closed down. The company president favors making the move for various reasons, but several directors have asked for more detailed information before approving the decision. Their main concern is that abandoning the Tombstone lot would create a large loss. You are asked to analyze the proposal and to provide information to help the directors decide whether to support the president’s desire to move to Tumbleweed. Here’s the Catch22 – you work for the president and she doesn’t care about the quantitative information. She operates on gut instincts which, in the past, have proven very successful. She makes it very clear to you that your career with the company depends on whether or not you’re a “team player” (i.e. whether or not you make the numbers come out to support her recommendation). You have an unemployable spouse, two young kids in diapers, a dog who eats as much as your entire family combined, a HUGE mortgage, car loans, college loans, and you support your lousy spouses’ mother who lives in your attic. To top things off, there is a world-wide recession, and there are no jobs available within your trained profession. The alternative is to work at the local fertilizer company employed as a manual manure spreader. This would reduce your salary to one-fourth what you are currently making. Should this happen, you will lose the house, your spouse will stay with you (bummer!), your kids will starve, and your spouses’ mother will have to walk on one leg 5 miles DOWNHILL both ways in order to get to the store to buy her cigarettes. (Sorry, I took a little time to digress here so that you would get the full picture of how important it is for you to keep your job.!!) The president provides you with the following data, indicating that it was arrived at in as objective of manner as possible: 1. Loss from abandoning the Tombstone lot – The land and facilities of the Tombstone lot have a $1 million book value. Virtually none of the machinery or other assets can be sold, and the land is not suitable for any other use without prohibitive reclamation costs. Based on the price predicted by the company’s independent real estate consultant, only $100,000 cash would be received through the sale of the land and the facilities. The $900,000 loss from this sale is standing between the directors and their support for the president. 1. Investment in the new lot – The Tumbleweed feedlot would have an up-front total cost of $5 million. In addition to being closer to feed sources and cattle buyers, this feedlot would double the capacity of the Tombstone lot. Management estimates that 100,000 head of cattle could be handled every year. 2. Comparative costs – At their full capacity volumes of 50,000 and 100,000 head, the cost per head at the old lot and predicted cost per head at the new lot are as follows: Variable Costs – Tombstone, $88 per head Tumbleweed, $72 per head Depreciation (fixed cost) – Tombstone, $2 per head Tumbleweed, $5 per head Assume that both feedlots can operate for 10 years and the revenue per head is $77 under both scenarios. The corporation is subject to 30% income taxes. It will not be possible to operate both the Tombstone and Tumbleweed lots. As a reflection of the high risk that they perceive, the directors want to have at least a 20% return on any investment that the company would make in the new Tumbleweed feedlot. Required: 1. Use the net present value method to analyze the data. Present any pertinent schedules needed to produce the data with your analysis. Which feedlot location should be selected by the company? 2. Assume that data supports keeping the Tombstone lot. What would you recommend then, and why?

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