Question 4: Business Decision

Harbor Light Coffee: a new café or wholesale beans

Units 1, 2, 3 and 4
8 points
About 40 minutes

You can use a calculator on this question, just like on exam day.

A long case about a business choosing between two options, with financial and nonfinancial details: you describe a factor affecting the business, compare the options using financial and nonfinancial criteria, and recommend one, backed by three criteria and evidence from the case. On the exam: Question 4 of 4, Section IIB (Questions 2–4 share 65 minutes); about 40 minutes including a 15-minute reading period, 15% of the score. Assesses Skill Category 3. Section II has 4 free-response questions in 90 minutes (40% of the score). The exam is fully digital in Bluebook, and only a 4-function calculator is allowed (handheld or the built-in Desmos 4-function calculator).

The question and its sources

You have been hired as a consultant to help the business described below choose between two courses of action. Read the whole scenario before you start writing. Respond to parts A, B, and C.

Background

Harbor Light Coffee runs six cafés in a coastal city and roasts its own beans on a small roaster at its first café. It has 90 employees. Its mission statement reads: 'To be every neighborhood's favorite place to gather over great coffee.'

Bags of Harbor Light's beans sell well in its cafés, and three regional grocery chains have asked to carry them. Meanwhile, Northgate, a neighborhood across the city, is growing fast: a new office park and 2,000 new apartments opened there this year.

Unemployment in the city is low, and Harbor Light's cafés now take about six weeks to fill an open barista job.

The owners have narrowed their choices to two courses of action. Harbor Light has $500,000 in cash available. For either option, it would need a loan or new investors to cover any cost above that amount.

Source: Hypothetical scenario written for this practice question

Option 1: Northgate Café

Harbor Light would sign a 10-year lease in Northgate, build out a seventh café and hire 14 employees. Two national coffee chains already have shops within four blocks of the site.

Source: Hypothetical scenario written for this practice question

Option 2: Wholesale Roastery

Harbor Light would buy a large roaster, lease a warehouse and hire 6 employees to sell bagged beans to about 40 grocery stores. Grocery chains pay their suppliers 60 days after delivery, so Harbor Light would wait two months to be paid for each shipment. Shoppers across the region would see the Harbor Light brand on store shelves.

Source: Hypothetical scenario written for this practice question

Table 1. Projected income statement for the first full year, and other financial effects

Item	Option 1: Northgate Café	Option 2: Wholesale Roastery
Revenue	$900,000	$1,400,000
Cost of goods sold	$315,000	$910,000
Gross profit	$585,000	$490,000
Operating expenses	$495,000	$290,000
Operating profit	$90,000	$200,000
One-time cost to start	$450,000	$800,000
Outside funding needed	$0	$300,000
Projected net cash flow, first six months	+$20,000	−$120,000

Source: Hypothetical data written for this practice question

Suggested time: 40 minutes

Your answers are saved in this browser as you type.

Part (A(i))

1 point

Businesses are shaped by internal factors, market factors and external factors. Describe one internal, market or external factor in the scenario that affects Harbor Light.

Your answer to part (A(i))

0 / 2,500 characters

Part (A(ii))

1 point

Explain how the factor you described in part A(i) creates an opportunity or a problem for Harbor Light.

Your answer to part (A(ii))

0 / 2,500 characters

Part (B(i))

1 point

Compare the two courses of action using projected operating profit margin as the criterion. Describe a difference or similarity between them, and include specific evidence related to each course of action.

Your answer to part (B(i))

0 / 2,500 characters

Part (B(ii))

1 point

Compare the two courses of action using one other financial criterion. Describe a difference or similarity between them, and include specific evidence related to each course of action.

Your answer to part (B(ii))

0 / 2,500 characters

Part (B(iii))

1 point

Compare the two courses of action using one nonfinancial criterion. Describe a difference or similarity between them, and include specific evidence related to each course of action.

Your answer to part (B(iii))

0 / 2,500 characters

Part (C)

3 points

Recommend a course of action for Harbor Light. In your response, do the following: recommend one of the two courses of action in the scenario; explain why you recommend it; and support your recommendation with any three specific criteria, financial or nonfinancial (they may include the criteria from part B), with evidence from the scenario for each criterion.

Your answer to part (C)

0 / 2,500 characters

Checking scoring…

Scoring it yourself shows you the rubric, examples and a model answer. Try writing your answer first.