Flexible Budget My Kiosk Corporation (MKC) is a well-known company in the Malaysian kiosk business. It was one of the first to operate and manage a chain of kiosks selling hand phones and accessories in the nation's shopping malls. The company is currently planning to open another kiosk, this time a new shopping mall in downtown Kuala Lumpur. CityWalk is a shopping center located near two of the city's major malls KLCC Suria and Pavilion, against which it competes. It is important for MKC to have a presence in CityWalk as the shopping center is expected to be another destination shopping area.

As finance manager, my role is to analyze the financial aspects of the new kiosk that is planned for CityWalk. The figures needed will include key managerial accounting metrics such as breakeven ratio, setup costs, cost-volume-profit analysis and return on investment. Each of these will be calculated on the basis of estimates from other MKC kiosks in the area and the known costs of doing business in CityWalk. This report will feature all of these budgets and calculations.

Estimated Revenues

The CityWalk mall is in a high-density area in the center of Kuala Lumpur. There are other major malls in the area that draw traffic, in addition to a number of high-rise condominium towers and major hotels. Many major streets line the area of the major, including major nightlife street Jalan P. Ramlee and one of downtown KL's major thoroughfares in Jalan Raja Chulan. There are several nearby public transit points, including the subway stop at KLCC and the monorail stops at Bukit Nanas and Raja Chulan stations. There are bus stops on Jalan P. Ramlee right in front of CityWalk. Thus, the area has tremendous potential, in particular for an air-conditioned means of getting from Jalan P. Ramlee to the area around Pavilion mall.

As a result of its central location and high probability of foot traffic, CityWalk executives and MKC agree that it is likely kiosks on the main floor of CityWalk will see a tremendous amount of foot traffic. As a result, it is estimated that the average monthly revenue for this kiosk will be RM 50,000 (3 RM = $1 U.S.). This figure will be used for the calculations as the baseline. It equates to RM 600,000 annually. In addition, for the purposes of developing alternate budgets for above-expected or below-expected performance, monthly revenue figures of RM 41,667 (RM 500,000 annually) and RM 58,333 (RM 700,000 annually) will also be tested. Although there is some seasonality in shopping patterns in Malaysia due to holidays, it will be assumed that there will be no major month-to-month differences in sales.

Estimated Costs

There are a number of costs associated with setting up the kiosk. There are setup costs, variable costs, fixed costs and overhead costs. The cost of setup is expected to be relatively low. MKC, being one of the most experienced kiosk operators in the country, has close ties to kiosk producers and enjoys significant buying discounts. The startup cost of a kiosk includes the price of the kiosk itself. The kiosk is high-end because of the nature of the product, and will be fitted with a substantial amount of electrics. The total cost of the kiosk is estimated to be around RM 20,000. The second component of the startup is the labor. Labor costs in Malaysia are low, and it takes only a few hours to set up a kiosk from start to finish. The total labor cost will include electricians, but even with them included the total labor cost should amount to no more than RM 5000. Fixed costs associated with activities such as the initial hiring for the kiosk will not be counted, since the Human Resources department of MKC will be utilized, and no addition staff hours will be required beyond what the company is already obligated to.

The next cost type is the variable costs. This cost is largely comprised of cost of goods sold, as will be explained. The cost of goods sold is estimated to be 28% of the total revenues for any given period. This may vary depending on the types of products sold, but MKC has arrived at this estimate using figures from its kiosks elsewhere in downtown KL.

The next cost type is the fixed costs. These include rent, staff and utilities. The rent is fixed by CityWalk at RM 21,000 per month. The staff at the kiosks are typically paid a flat rate of RM 16 per hour, plus a 1.5% commission on sales. There will be one staff member at all times, working a total of a 12-hour day, seven days a week. This amounts to a fixed staff cost of RM 1344 per month. A supervisor will also do some work at the kiosk and will cost RM 3000 per month and will often be present during the busiest hours. Utilities are expected to cost around RM 1500 per month. Overhead is the same as fixed costs, and is included in that calculation.

Flexible Budgets

The flexible budgets for the three different revenue levels are as follows. There are two profit components. The ongoing operating profit does not include setup costs. The net profit is for the first year only including setup costs.

For the RM 600,000 annual revenue level, the income statement will look as follows:

MKC CityWalk

all figures in Ringgit

Month

0

1

2

3

9

10

11

12

Revenue

50000

50000

50000

50000

50000

50000

50000

Startup Costs

Kiosk

20000

Labor

Variable Costs

14000

14000

14000

14000

14000

14000

14000

Staff Commission

Contribution

35250

35250

35250

35250

35250

35250

35250

Fixed Costs

Rent

21000

21000

21000

21000

21000

21000

21000

Utilities

Staff

Net Profit

-25000

Total Operating Profit

100872

Total Net Profit

75872

For the RM 500,000 level, the income statement will look as follows:

The first is that a significant portion of costs are fixed. Therefore, changes in revenues will have a significant impact on the profits of the kiosk. If revenues are RM 100,000 lower in the year than expected, the kiosk will still be profitable, but not by much. If revenues are RM 100,000 higher than expected, the kiosk will be very profitable. The second thing that this analysis indicates is that the CityWalk kiosk is a good investment, if sufficient traffic at the mall can be generated. As this is a new mall, this traffic cannot be assumed. It may be wise to make a deal with the mall to lower the rent if the traffic throughput is not as strong as expected, otherwise the kiosk will be forced to close.
Analysis for the Kiosk

A cost-volume-profit analysis is used to "compute the volume level at which total revenues are equal to total costs" (eNotes, 2011). This is done by finding the revenue point at which contribution to fixed costs equals the fixed costs. The first step in this analysis is to determine the level of fixed costs. For the kiosk, per month, it has been determined that this level is:

Rent

21000

Utilities

Staff

Total Fixed Costs

26844

The second step is to determine the sales level that will deliver a contribution to fixed costs equal to that amount. This is done by taking into account the revenue and the variable costs. For the normal amount of expected sales, the contribution is as follows:

Revenue

50000

Variable Costs

14000

Staff Commission

Contribution

35250

The Excel solver function can determine the revenue level at which the contribution will equal RM 26,844. This point is as follows:

Revenue

38076.6

Variable Costs

10661.45

Staff Commission

Contribution

26844

Thus, the breakeven point, where the profit will equal zero, is RM 38,076.6 in revenue per month. This is an annual revenue total of RM 456,919.20. We know that at RM 600,000 per annum of revenue, the kiosk will reach the target profit of RM 100,000 per annum. The breakeven point reflects a scenario where the revenue falls 23.8% below the target revenue level. This figure is known as the margin of safety. The kiosk will continue to be profitable until revenues decline to this level of RM 38,077 per month. Anything below that level and the kiosk will lose money.

The return on investment can be calculated for the different revenue levels. At the breakeven point. There is leeway in determining the baseline for the ROI, depending on how the company wants to define the investment. In the case of the kiosk, the initial investment is RM 25,000. This gives an ROI as follows:

(Gain from investment -- cost of investment) / cost of investment

(100,872 -- 25,000) / 25,000 = 303%

If the kiosk's revenues are only RM 500,000 per year, then the return on investment will change. New variable costs must be calculated. The result is an ROI equation as follows:

(30,374 -- 25000) / 25000 = 21.4%.

If the kiosk's revenues are RM 700,000 per year, then the return on investment will be:

(171,369 -- 25,000) / 25,000 = 585%

This shows that the relatively low initial investment will give the kiosk a high ROI under all three scenarios. The low initial investment, however, also means that any drop below profitability will give the kiosk a strong negative ROI.

Recommendation

It is recommended that MKC lease kiosk space in CityWalk. MKC has been successful…