Reference no: EM132325230

Case study -

According to Malaysian newspaper The Star, bubble tea cafés are becoming increasingly popular across the country. In the past two years, five or more chains have been formed, opening cafés in mainly urban locations.

In the article, leading bubble tea firms provide some interesting information on the rapid growth of the product in recent years. According to Bryan Loo of Chatime (which is quoted on the Taiwan stock exchange), the rationale for setting up a bubble tea business was that there is a strong demand for tea in Malaysia, but no tea businesses as such - in the coffee business names such as Starbucks are already in situ. Bubble tea is also more appealing to health-conscious consumers.

The primary business model for the new cafés is a franchise model. The cost of setting up a café is in the RM 250 000-500 000 range (about £50 000-£100 000), depending on factors such as location, size and renovation costs. According to Billy Koh, the franchisor for Gong Cha brand bubble tea, overhead costs of running a caf6 are typically higher in a shopping mall franchise than in a normal high-street type shop. However, the profit margins are reasonable at approximately 30 per cent for a. typical franchise operation. The lower margin is attributable to the high materials cost.

Questions -

1. Can you think of some examples of overhead costs that might be incurred by cafés such as those described above?

2. Explain how the overhead costs are treated in the following situations

a. Assigning overhead to production and service centers.

b. Re-allocation of overhead of service centers to production centers.

c. How would these overheads affect profit if sales declined?