CASE STUDY 22.....

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Durham College *

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Management

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Apr 3, 2024

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SADAQ ABDI Professor: JONES FERDINAND COURSE: Introduction to Managerial Accounting MARCH 19. 2024 1

Summary TeaTime.com was founded by Patrick Vickers, ex-internal auditor, who aimed to fulfill his dream of business while enjoying flexibility. Patrick's love for tea, developed during his travels to Asia, inspired him to start an online premium tea delivery service in Canada. Despite strong initial demand, he faced financial challenges in his first year. His concerns about profitability led him to consider implementing activity-based costing to improve cost management and increase membership. Issue The main issue facing TeaTime.com is its struggle to achieve profitability despite strong demand for its premium tea delivery service. Patrick Vickers, the founder, is concerned about the company's financial performance and its ability to support his family. Competition from premium tea shops and the need to increase membership to enhance profitability are pressing challenges that need to be addressed to ensure the business's sustainability and success. Two alternatives 1. Increase membership through marketing and promotions to boost revenue. 2. Implement activity-based costing to identify and reduce overhead costs for improved profitability. Relevant area of managerial accounting. The main area of managerial accounting I would apply in TeaTime.com's case is activity- based costing (ABC) for overhead cost analysis. ABC helps identify the activities driving 2

overhead costs, such as shipping and general administrative tasks. By allocating costs based on these activities, Patrick can better understand the true cost of his operations and make informed decisions to improve profitability. SWOT ANALYSIS Strengths: 1. TeaTime.com offers a unique service by delivering premium tea blends to members' homes, giving a personalized touch. 2. There is a growing market for premium tea delivery due to increasing awareness of tea's health benefits. 3. Patrick's auditing background helps him run operations efficiently and cost- effectively. Weaknesses: 1. Despite high demand, TeaTime.com faced financial challenges in its first year, suggesting issues with managing costs and generating revenue. 2. Being online-only limits TeaTime.com's reach compared to physical tea shops that offer a sensory experience. 3. The business heavily relies on Patrick's expertise, which could be risky if he can't be as involved. Opportunities: 1. TeaTime.com could expand by targeting new customers and locations. 2. Introducing new tea blends and products could attract more customers. 3

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3. Partnering with local tea producers could enhance sustainability efforts and offer unique products. Threats: 1. Premium tea shops in convenient locations could compete with TeaTime.com, especially if they offer similar delivery services. 2. Economic changes or shifts in consumer spending could affect demand for premium tea. 3. Regulatory changes related to online businesses or imported goods could impact TeaTime.com's operations and costs. Qualitative factors  Advantages of TeaTime.com: 1. TeaTime.com stands out by offering busy Canadians a convenient premium tea delivery service, reflecting their appreciation for quality tea. 2. The increasing health-consciousness among consumers can drive more customers to TeaTime.com, drawn by the health benefits of tea. 3. With four different blends of loose-leaf tea each month, TeaTime.com provides members with a diverse range of choices to suit various tastes. 4. By sourcing tea from small producers in Asia, TeaTime.com supports local businesses and offers authentic, high-quality tea to its customers. 5. Members can pause and restart their accounts, offering flexibility to cater to their changing needs and preferences. 4

6. The discussion board on the website fosters a sense of community among members, allowing them to share and discuss their favorite blends.  Disadvantages of TeaTime.com: 1. TeaTime.com faced financial challenges in its first year, raising concerns about its long-term profitability. 2. The competitive premium tea market, with convenient premium tea shops, poses a challenge to TeaTime.com. 3. The business heavily relies on Patrick's expertise and contacts in Asia, which may limit its scalability. 4. Operating solely online may limit TeaTime.com's reach compared to physical tea shops, potentially restricting its customer base. 5. The $20 monthly fee may not cover costs sufficiently, especially with fluctuations in tea prices or other expenses. 6. As the business grows, managing shipping, member accounts, and customer support may pose operational challenges. Careful consideration of these factors in the strategic planning and management of TeaTime.com can help address its challenges and leverage its strengths. Quantitative analysis Activity cost pool Cost driver Total quantity of cost driver Activity rare TOTAL Package and ship Number of boxes 3888 3.768 per box 14720 5

tea shipped Set up member accounts Number of new members 150 0.050 per member 750 Process pauses and restart request Number of pause and restart request 600 49.584 per request 29750 Support members Number of members 150 3.333 per member 500 Category 1 Category 2 Category 3 Category 4 0 1 2 3 4 5 6 C Quantitative analysis hart Title Series 1 Series 2 Series 3 6

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Teatime.com Income statement For the year end December 31, 20 Sales 77,760.00 Less: cost of goods sold 31,104.00 Gross profit 46,656.00 Less: Selling and administrative expensive Packaging (3.786 per box * 3888 boxes) 14.720 Set-up cost for member accounts (150*5) 750.00 Process pauses and restart requests (600*59.584) 29.750. Support members cost (150*3.333) 500 Marketing 2,500 Rent 1,5000. Loss (16,564) Recommendations 7

Patrick should consider implementing activity-based costing (ABC) to analyze and reduce overhead costs. By allocating costs to specific activities like packaging, member account setup, and marketing, he can better understand the profitability of each service and make informed decisions. Increasing membership through targeted marketing and promotions could also boost revenue. However, both options require careful consideration of their impact on TeaTime.com's profitability and sustainability. Implementing ABC may initially require time and resources but could lead to long-term cost savings and improved profitability. Increasing membership may require upfront investment but could lead to higher revenue and a more sustainable business model. Patrick should weigh these options based on their potential benefits and costs to determine the best course of action for TeaTime.com. Conclusion Patrick should aim to reduce the number of requests. If that's not feasible, he should consider implementing a small fee for processing requests. The cost associated with processing requests is significant, amounting to $29,750.40. Therefore, it's crucial to lower this cost by either limiting the number of requests or introducing a nominal processing fee. These actions will lead to substantial cost reductions and help the company return to profitability, not only that but also will enhance the quality of our service which can impact our work positively. 8

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