Kai on Wheels: second truck, longer hours, or catering?
Kai on Wheels is a Wellington food truck owned by Mere. It trades five days a week and currently averages $8,400 weekly sales. Food costs are 32% of sales; labour is $2,100 a week; the council site fee is $450 a week; fuel and power are $180 a week; other fixed costs are $600 a week. Mere already works 55 hours a week and does not want to exceed 60. Weekend queues are turning customers away, and three regulars have asked for catering.
Option A: buy a second truck for $28,000, funded by a 9.5% five-year loan. Projected sales are $5,600 a week, with food costs at 34%, extra labour $2,000 a week and an extra site fee $500 a week. A second site consent takes six weeks.
Option B: extend Friday and Saturday hours. This adds $900 weekly sales at 35% food cost and $350 extra labour, with no capital spending.
Option C: offer catering using $6,500 of equipment, expected deposits of $1,800 a month, variable costs 40% of catering sales, and about 10 owner hours a week.
1. Calculate Kai on Wheels' current weekly profit and contribution margin ratio. Explain why the contribution margin ratio is useful when comparing the three options.
Read the worked answer
Current weekly sales = $8,400. Food cost = 0.32 × $8,400 = $2,688. Contribution = $8,400 − $2,688 = $5,712. Contribution margin ratio = $5,712 ÷ $8,400 = 0.68, or 68%.
Fixed/committed weekly costs = labour $2,100 + site $450 + fuel/power $180 + other $600 = $3,330. Profit = $5,712 − $3,330 = $2,382.
The ratio shows how many cents from each sales dollar remain to cover fixed costs and profit after food cost. It lets Mere compare options of different sizes: Option B's extra sales have a 65% contribution ratio (35% food cost), while Option A's extra sales have 66% (34% food cost). Catering has only 60% (40% variable cost), so each catering dollar contributes less. The ratio is not the whole decision because fixed costs, capital, loan repayments and owner hours differ.
2. Evaluate Option A and Option B using incremental weekly profit and owner time. Which is more feasible to start in the next two months?
Read the worked answer
Option A incremental weekly contribution = $5,600 × (1 − 0.34) = $3,696. Less extra labour $2,000 and site fee $500 = $1,196 before finance. Loan: $28,000 at 9.5% over five years. Monthly payment ≈ $588, or about $136 a week. Incremental weekly profit ≈ $1,196 − $136 = $1,060. But this ignores extra owner oversight, the six-week consent delay, and the risk that $5,600 sales does not appear. Debt adds $28,000 of obligation.
Option B incremental contribution = $900 × (1 − 0.35) = $585. Less extra labour $350 = $235 a week. No loan, no consent, and can start immediately. Owner hours: current 55; B may add a few hours, still under 60 if managed.
Feasibility in next two months: B is clearly more feasible. A has higher potential weekly profit, but cannot operate for at least six weeks, requires borrowing, and depends on a new site performing. B is a low-risk test of demand. If sales grow, A can be reconsidered with better evidence.
3. Recommend one option for the next 12 months. Justify with financial and non-financial factors, and state one control to reduce the risk you identify.
Read the worked answer
Recommendation: start Option B now, trial Option C catering with a deposit and casual staff, and defer Option A until the second site consent is approved and 8–12 weeks of B/C data exist.
Financial: B adds about $235 weekly profit with no capital. C: monthly catering contribution = $1,800 − (0.40 × $1,800) = $1,080. Equipment $6,500 pays back in about 6 months ($6,500 ÷ $1,080 ≈ 6.0) before owner time. But C needs about 10 owner hours a week, which would take Mere to 65 hours and breach the 60-hour limit. So C should only proceed if a staff member covers packing/delivery or bookings are capped. A adds about $1,060 weekly profit but carries $28,000 debt and a six-week delay; the loan must be paid even if sales disappoint.
Non-financial: weekend queues and regular requests show unmet demand, but reputational risk from slow service is real. A second truck could dilute quality. Control: set a weekly cash-flow and hours log; only spend on C after a $1,500 non-refundable catering deposit, and review B's sales against a $700 weekly target before signing any truck loan.