Harbour Roast Coffee Ltd: closing a loss-making café and a supermarket offer

The reported loss is misleading

Before head-office allocation the café earns: 310,000 − 186,000 − 95,000 = NZD29,000. The NZD4,000 'loss' exists only because 33,000 of head-office cost has been arbitrarily allocated to it, and that cost does not disappear.

Contribution and avoidable costs

• Café contribution: 310,000 − 186,000 = 124,000
• Avoidable direct fixed costs: 95,000 − 48,000 non-cancellable lease = 47,000
• Net benefit of keeping the café open: 124,000 − 47,000 = 77,000

If the café closes

• Contribution lost: (124,000)
• Costs saved: +47,000
• Head-office costs: no change (irrelevant to the decision)
• Profit falls by NZD77,000

Conclusion

Do not close on these figures. Closing would make the company worse off by 77,000 a year, and would still carry the 48,000 lease to 2027 - the worst outcome: costs without revenue.

What could change the answer

• Subleasing the café space, or converting it to another use that earns more than 124,000 contribution, would make closure viable; the sublease income is a relevant benefit.
• If the café draws foot traffic that supports retail bean sales and subscriptions, closing may cost sales in the other segments - a relevant opportunity cost not in the table.
• Look at the café's own trend: is 124,000 contribution stable or falling? A trend matters more than one year.

Interim action: keep it, replace the manager, and set a contribution target rather than a profit target, since allocated head-office cost is outside the manager's control.

Unit economics of wholesale

• Variable cost per kg: 294,000 ÷ 30,000 = NZD9.80
• Contribution per kg: 14.00 − 9.80 = NZD4.20

Capacity constraint

Practical capacity is 36,000 kg; current output 30,000 kg, so only 6,000 kg of spare capacity exists. The order is 20,000 kg, so 14,000 kg must displace existing wholesale sales at NZD14.00.

Incremental analysis

• Contribution from the order: 11.20 − 9.80 − 0.30 packaging = 1.10 per kg × 20,000 = +22,000
• Lost contribution on displaced wholesale: 4.20 × 14,000 = (58,800)
• Net effect: (36,800) → reject at this price

Minimum price

To be worthwhile, total contribution on 20,000 kg must cover the 58,800 opportunity cost: 58,800 ÷ 20,000 = 2.94 per kg. Minimum price = 9.80 + 0.30 + 2.94 = NZD13.04 per kg. That is close to the existing wholesale price and gives the supermarket no reason to be supplied at a discount - a strong signal that this order does not work at current capacity.

Alternative structures

• A 6,000 kg trial order uses only spare capacity: contribution 6,000 × (11.20 − 9.80 − 0.30) = NZD6,600, all of which is incremental profit. Offer this instead.
• Adding roaster capacity would be justified only if the extra 14,000 kg contribution (22,000 less any additional fixed costs) exceeded the cost of the expansion - and online growth at 30% will absorb spare capacity soon anyway.

Qualitative factors on the café

• Brand and foot traffic. A café creates visibility and a physical touchpoint that supports wholesale and subscription sales; closing it may cost sales the segment table cannot show.
• Staff and community. The manager has resigned; closing entirely looks reactive and affects morale and local reputation.
• Lease. The 48,000 non-cancellable commitment is a sunk obligation to 2027; the question is what earns most against it - trading, subletting, or a different use.

Qualitative factors on the supermarket order

• Price cannibalisation. Existing wholesale customers paying 14.00 may find out and demand the supermarket price, which would erode the whole wholesale contribution - a risk not in the numbers.
• Volume certainty versus margin. A supermarket contract gives dependable volume and lower selling costs, which has value in a seasonal market.
• Capacity will tighten. Online is growing 30% a year; in twelve to eighteen months there may be no spare capacity at all, so a large fixed-price contract could force up costs or require capital.
• Customer power. Supermarkets are demanding buyers; a low entry price is hard to renegotiate.

Recommendation to the board

1. Keep the café trading - closing destroys 77,000 of annual benefit and leaves the lease. Appoint a manager with a contribution-margin target, and review in twelve months.
2. Decline the 20,000 kg order at 11.20. Counter-offer a 6,000 kg trial, or a larger volume at no less than approximately 13.04 per kg.
3. Plan capacity now - commission a roaster expansion review, since online growth will need the headroom regardless of the supermarket.

Overall, the segment table overstates the café problem and understates the cost of the supermarket deal: allocated costs made one look worse than it is and idle capacity made the other look cheaper than it is.