Case 2 - Mystical Monk Coffee

Mystic Monk Coffee Case What is the most important problem facing Mystic Monk Coffee? Mystic Monk Coffee’s current earnings and donations are insufficient to generate the funds needed to purchase Irma Lake Ranch. Mystic Monk Coffee’s net profit margin of 11% and current donation inflows will not generate enough earnings to acquire an $8.9 million ranch within a reasonable timeframe. What are the most important facts that should be considered in regard to this problem? Upon careful analysis of the case facts, I have concluded the following facts that pertain to the insufficient earnings: ● Carmelites received a $250,000 donation from an individual to use toward the purpose of the monks choosing. ● Mystic Monk Coffee’s net profit margin is 11% ● Shipping costs average 19% of revenues ● 18% commission on sales paid to affiliate sites ● 12-ounce bags of coffee sold for $9.95 ● Average monthly sales of $56,500 ● Coffee is roasted exclusively by Brother “Java” for a max of six hours per day. ● Coffee roaster has a production limit of 540lbs per day ● The current roaster is not at full capacity- only producing 135lbs per day due to six-hour day. ● Cost of the larger roaster is $35,000 with the capacity to roast 130lbs per hour or 780lbs per six-hour day. ● 69 million members of the Catholic Church in the U.S. What are the reasonable alternative courses of action that Father Daniel Mary might take in regard to the problem you have identified? Include a summary of any analysis you have done in regard to the identified major problem as well as the pros & cons of the alternative courses of action you have identified. 1) Use volunteer’s to run current roaster at max capacity & increase the sale price to $13: • As shown in the analysis in Figure 1.0 in the appendix, Mystic Monk Coffee’s current production level roughly generates an annual profit of $70,924, excluding any merchandise sales. If they were to use the roaster at its full capacity, they could bring in an annual profit of $283,694, which is a significant increase from the profit they are currently generating. In order to keep the roaster running 24 hours a day, they should ask church members to donate their time and have them work 3-hour shifts. As shown in the analysis in Figure 1.1 in the appendix, in addition to running the roaster 24-hrs, the selling price of coffee should be increased to $13, and merchandise should be marked up by 5%. $13 is a reasonable price considering inflation and consumers being willing to pay more for specialty coffee. 2) Drop affiliation websites to lower commission & introduce Mystic Monk Coffee to Catholic Congregations: • Mystic Monk Coffee will need to contact Catholic churches to gain business and increase sales and donations. If Mystic Monk Coffee could sell coffee and merchandise to churches and provide coffee for church events, they would not only increase profits but increase brand awareness. With roughly 69 million members of the Catholic church in the U.S., if Catholic churches will promote Mystic Monk Coffee, they should be able to cut ties with their affiliate sites which will allow them to lower total cost of goods sold. Additionally, Father Daniel Mary should share his strategic vision with Catholic churches and ask for donations to help fund the new Mount Camel. 3) Purchase the larger roaster will increase the net profit margin to 16% • If Mystic Monk Coffee purchased the larger roaster for $35,000, as shown in the analysis in Figure 1.2 in the appendix, the larger roaster will roast as much an hour as the current roaster would roast in a day, given the six-hour shifts. This increases production by a factor of six. Generating roughly $596,045 in annual net profit with an increase in net profit margin to roughly 16%. The roaster will also pay for itself in less than 33 days, as shown in the analysis in Figure 1.2 in the appendix. Please see Table 1.1 for a detailed analysis of the pros & cons of the three proposed alternatives. CONS PROS TABLE 1.1 ALTERNATIVE 1: USE CURRENT ROASTER AT MAX CAPACITY & INCREASING SALES PRICE TO $13 ● Gives those who cannot donate monetarily the opportunity to donate their time. ● Low-cost ● Maximize production ● Must rely on volunteers ● Time to train volunteers ● Quality control could be a potential issue. ALTERNATIVE 2: DIVERSIFYING ADVERTISEMENT & INCREASE DONATIONS ALTERNATIVE 3: PURCHASE OF LARGER ROASTER ● Provides an opportunity for churches to get involved with sales. ● Gives a competitive advantage ● Increase brand awareness ● A larger volume of production capacity ● Increase net profit margin ● Donations can fluctuate ● Churches could deny Mystic Monk Coffee’s proposals ● The new roaster will cost $35,000 ● Annual profits will not increase beyond the six-hour workday. What is your recommended course of action, and why is that the best course of action? My recommendation would be alternative 3, purchasing the larger roaster in order to generate sufficient funds to purchase the Irma Lake Ranch. For the following reasons • • Increase net profit margin to roughly 16% o The larger roaster will increase daily production by a factor of 6. Resulting in a 16% net profit margin. No volunteers needed o With Brother Java working six-hour shifts Mystic Monk Coffee will be generating an annual profit of roughly $596,000, with additional profit from selling merchandise, this should be sufficient if they continue to receive generous donations Appendix FIGURE 1.0 *note: Calculations exclude profits from merchandise CURRENT PRODUCTION LEVEL: 6 HRS LBS DAILY BAGS PRODUCED DAILY BAGS MONTHLY ANNUAL COFFEE SALES REVENUE PROFIT ON COFFEE [(540lbs/ 24 hrs)/6 hrs]= 135 lbs daily 135 lbs (16 oz/ 12 oz)= 180 12 oz. bags produced daily 180 bags * 30 days = 5,400 bags monthly (5,400 bags*12 months) $9.95 = $644,760 Annual coffee sales revenue $644,760* 11% net profit margin = $70,924 profit on coffee 24 HR PRODUCTION: BAGS PRODUCED DAILY BAGS MONTHLY ANNUAL COFFEE SALES REVENUE PROFIT ON COFFEE SALES 540 lbs(16oz/12oz)= 720 12 oz. bags produced daily 720 bags * 30 days= 21,600 bags monthly ( 21,600 bags * 12 months) $9.95 = $2,579,040 Annual coffee sales revenue $2,579,040* 11% net profit margin = $283,694 profit on coffee sales FIGURE 1.1 $13 SELLING PRICE: ANNUAL COFFEE REVENUE (21,600 bags * 12 months) $13 = $3,336,00 Annual coffee revenue PROFIT ON COFFEE SALES $3,110,400 * 11% net profit margin = $370,656 profit on coffee sales FIGURE 1.2 *note: Calculations exclude profits from merchandise LARGER ROASTER: 6 HRS LBS DAILY BAGS PRODUCED DAILY BAGS MONTHLY ANNUAL COFFEE SALES REVENUE PROFIT ON COFFEE 780 lbs daily 780 lbs (16 oz/ 12 oz)= 1,040 12 oz. bags produced daily 1,040 bags * 30 days = 31,200 bags monthly (31,200 bags*12 months) $9.95 = $3,725,280 Annual coffee sales revenue $3,725,280 * 16% net profit margin = $596,045 profit on coffee *Increase in net profit by a factor of 6 MONTHLY NET PROFIT (11% NET PROFIT MARGIN) DAYS NEEDED TO RECOVER PRICE OF ROASTER (31,200 bags * $9.95)11% = $34,148 net monthly profit $35,000/ $34,148 = 1.024 ≈ 33 days