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Automatic merchandising and the University of British Columbia Louie, Shirley Beverley 1976

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A U T O M A T I C M E R C H A N D I S I N G A N D T H E U N I V E R S I T Y O F B R I T I S H C O L U M B I A by Shirley Beverley Louie B.H.E., University of British Columbia, 1959 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION in the Department of Commerce and Business Administration We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA February, 1976 In presenting th i s thes is in pa r t i a l fu l f i lment of the requirements for an advanced degree at the Un ivers i ty of B r i t i s h Columbia, I agree that the L ibrary shal l make it f ree l y ava i l ab le for reference and study. I fur ther agree that permission for extensive copying of th i s thes is for scho lar ly purposes may be granted by the Head of my Department or by his representat ives. It is understood that copying or pub l i ca t ion of th i s thes is for f i nanc ia l gain sha l l not be allowed without my wr i t ten permission. Department of COMMERCE The Univers i ty of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5 Maroh R r 1Q7fi ABSTRACT The purpose of t h i s study i s to investigate the economic f e a s i b i l i t y of the financing, c o n t r o l l i n g and administering of the vending services on the Un i v e r s i t y o f ' B r i t i s h Columbia campus by the Unive r s i t y Food Services Department. To do t h i s , sales are projected for a period of f i v e years (a year being an academic term from September 1st to August 31st), based on data c o l l e c t e d on past vending sales and based on the pro j e c t i o n of student enrollment made by the U.B.C. Department of Academic Planning. Sales were estimated i n ph y s i c a l units to minimize the e f f e c t of i n f l a t i o n and p r i c e increases. Two estimates were made (a high and a low estimate) based on the Department of Academic Planning's high and low estimates of student enrollment. Only major vending products were considered - c i g a r e t t e s , cold drinks, hot drinks and candy because they make up more than 99% of the t o t a l vending sa l e s . Cost of goods sold, cash r e c e i p t s , operating expenses and net p r o f i t s are also projected on the same basis . A f t e r determining the c a p i t a l outlay of the investment, the cash flows for the f i v e year period (from September 1975 to August 1980) are determined and then discounted to present values using two discount rates - 10% and 10%%. These discounted incomes generated by the investment are then compared to discounted incomes generated by the continuation of the present system - that of r e c e i v i n g commissions from an outside vending firm. On a short term basis i i i (that of f i v e years), i t i s obvious that i t i s more p r o f i t a b l e f o r the U.B.C. Food Services Department to stay with the present system. On a long term basis (over f i v e years), t h i s department would generate more income and r e t a i n greater c o n t r o l by administering the operation. TABLE OF CONTENTS Page ABSTRACT i LIST OF TABLES v l LIST OF FIGURES i x Chapter I. INTRODUCTION 1 Purpose of the Study 1 History and Growth of Vending 2 History and Growth of Vending at U.B.C 5 I I . THE VENDING INDUSTRY 10 Why Vending? 10 Size of the Industry 12 Limitations of Vending . . . . . 13 What Products Vend 14 Location 15 Vending Terminology 17 Need f or the Study 18 I I I . THE INVESTIGATION 23 The Investment Proposal 23 Design of the Investigation 23 Assumptions 24 IV. FORECASTING 26 General Discussion of Forecasting 26 The Uni v e r s i t y Population 28 i i i i v Chapter Page Per Capita Consumption of Vended Products 35 Cost of Goods Sold 48 Cash Receipts 51 Estimated Gross P r o f i t s f o r Vending Products . . . 53 Operating Expenses 56 Wages 56 Vending Machine Maintenance . . 58 Truck Expense 58 Insurance 58 Miscellaneous Expense 59 Commissions 59 Tota l Operating Expenses 62 Comparison of Operating Expenses 64 V. CAPITAL BUDGETING 65 Net Investment 66 Financing the Vending Operation 68 Investment Analysis 69 Net-Present Value Approach 73 VI. Investment A l t e r n a t i v e 78 Comparison Between Investment Proposal and Investment A l t e r n a t i v e 83 Salvage Value 84 Future Income 84 VII. THE FUTURE OF VENDING 90 Future Research 91 V Chapter Page VIII. SUMMARY AND CONCLUSIONS 93 APPENDIX 96 BIBLIOGRAPHY 107 LIST OF TABLES Table Page 1. Vending Machines at the Un i v e r s i t y of B.C 9 2. Uni v e r s i t y Population for the Years 1970-71 to 1974-75 30 3. Projection f o r Student Enrollment at U.B.C. for the Years 1975-76 to 1979-80 31 4. Estimate of Un i v e r s i t y Population f o r Years 1975-76 to 1979-80 High Estimate 33 5. Estimate of Un i v e r s i t y Population f o r Years 1975-76 to 1979-80 Low Estimate 34 6. Estimated Number of Packages of Cigarettes Sold Through Food Services Department-Commissioned Machines f o r the Period September 1975 to August 1980 Using the High Estimate 37 7. Estimated Number of Packages of Cigarettes Sold Through Food Services Department-Commissioned Machines for the Period September 1975 to August 1980 Using the Low Estimate 37 8. Estimated Number of Cups of Cold Drinks Sold Through Food Services Department-Commissioned Machines for the Period September 1975 to August 1980 Using the High Estimate 39 9. Estimated Number of Cups of Cold Drinks Sold Through Food Services Department-Commissioned Machines for the Period September 1975 to August 1980 Using the Low Estimate 39 10. Estimated Number of Cups of Hot Drinks Sold Through the Food Services Department-Commissioned Machines f o r the Period September 1975 to August 1980 Using the High Estimate 41 11. Estimated Number of Cups of Hot Drinks Sold Through the Food Services Department-Commissioned Machines for the Period September 1975 to August 1980 Using the Low Estimate 41 v i v i i Table Page 12. Estimated Number of Candy Bars Sold Through the Pood Services Department-Commissioned Machines for the Period September 1975 to August 1980 Using the High Estimate 43 13. Estimated Number of Candy Bars Sold Through the Food Services Department-Commissioned Machines f o r the Period September 1975 to August 1980 Using the Low Estimate 43 14. T o t a l Vending Sales f o r the Period 1975-76 to 1979-80 High Estimate 46 15. T o t a l Vending Sales f o r the Period 1975-76 to 1979-80 Low Estimate 47 16. Cost of Goods Sold Per Serving 48 17. Estimated Cost of Goods Sold for Vending Products High Estimate 49 18. Estimated Cost of Goods Sold for Vending Products Low Estimate 50 19. Estimated Cash Receipts from Vending Sales f o r the Period September 1975 to August 1980 High Estimate 51 20. Estimated Cash Receipts from Vending Sales f o r the Period September 1975 to August 1980 Low Estimate 52 21. Estimated Gross P r o f i t s from Vending Sales f o r the Period September 1975 to August 1980 High Estimate 53 22. Estimated Gross P r o f i t s from Vending Sales for the Period September 1975 to August 1980 Low Estimate 54 23. Estimated Commissions Paid to the Alma Mater Society for Vending Sales Based on the High Estimate 60 24. Estimated Commissions Paid to the Alma Mater Society f o r Vending Sales Based on the Low Estimate 61 25. Schedule of Proposed Operating Expenses -High Estimate 62 v i i i Table Page 26. Schedule of Proposed Operating Expenses -Low Estimate 63 27. A Comparison of Operating Expenses (Expressed as a Percentage of Sales) 64 28. Vending Machines Required for Proposed Vending Operation 67 29. Cash Flow Analysis Based on the High Estimate 71 30. Cash Flow Analysis Based on the Low Estimate 72 31. Net Present Value of Investment - High Estimate . . . . 76 32. Net Present Value of Investment - Low Estimate . . . . 77 33. Projected Commissions for Food Service Vending Machines Based on the High Estimate 79 34. Projected Commissions for Food Service Vending Machines Based on the Low Estimate 80 35. Net Present Value of Investment A l t e r n a t i v e (Commissions Only) High Estimate 81 36. Net Present Value of Investment A l t e r n a t i v e (Commissions Only) Low Estimate 82 37. Comparison Between the Investment Proposal and the Investment A l t e r n a t i v e Based on the High Estimate 83 38. Comparison Between the Investment Proposal and the Investment A l t e r n a t i v e Based on the Low Estimate 83 39. Net Present Value of Investment - High Estimate . . . . 86 40. Net Present Value of Investment - Low Estimate . . . . 86 41. Net Present Value of Investment A l t e r n a t i v e (Commissions Only) High Estimate 87 42. Net Present Value of Investment A l t e r n a t i v e (Commissions Only) Low Estimate 87 43. Comparison Between the Investment Proposal and the Investment A l t e r n a t i v e f o r Years 6-10 88 LIST OF FIGURES Figure Page I. Vended Sales Volume 1961 - 1973 for Canada 16 I I . Estimate of Un i v e r s i t y Population 32 I I I . Estimated Cigarette Sales Per Capita Sold Through Food Service-Commissioned Vending Machines 38 IV. Estimated Cold Drink Sales Per Capita Sold Through Food Service-Commissioned Vending Machines 40 V. Estimated Hot Drink Sales Per Capita Sold Through Food Service-Commissioned Vending Machines 42 VI. Estimated Candy Sales Per Capita Sold Through Food Service-Commissioned Vending Machines 44 VII. Major Vending Product Line - Cost of Goods Sold, S e l l i n g P r i c e and Gross P r o f i t 55 i x CHAPTER I INTRODUCTION I. PURPOSE OF THE STUDY In these days of rapidly rising costs, i t i s becoming less and less profitable for the U.B.C. Food Services Department to supply manually-operated services to the university population during low volume periods. The operating times of the various food service units are therefore geared to the academic calendar. During the academic year, there i s an increasing need for vending to provide more of the services previously offered by the food service units. Since labour costs alone in this area have risen approximately 30% over the past three years"*", i t has become necessary to operate these units only when the volume of business warrants personal selling. These operating hours are constantly being reduced and w i l l no doubt continue to be reduced even further in order that an acceptable level of profit be maintained. Consequently, during a substantial part of the year, the vending machines provide either the only service in many areas, or a supplementary service to those units in operation. It is very obvious that vending has become an integral part of the total food service system on campus. It is therefore logical for the Food Service Department to look in the direction of vending as a From the payroll records of the Food Service Department. 1 2 possible source of a d d i t i o n a l income and as a means to meet the demands of the constant increase i n both the s i z e of the population and i n the geographical area i t covers. It i s the purpose of t h i s study to investigate the economic f e a s i b i l i t y of the financing, c o n t r o l l i n g and administering of the vending services on the U.B.C. campus by the Food Services Department. I I . HISTORY AND GROWTH OF VENDING In an e f f o r t to help the reader i n understanding the vending f i e l d as i t now e x i s t s , a b r i e f h i s t o r y of the development of the vending industry i s presented. Although the widespread use of vending machines i s a product of modern times, there i s evidence that the vending machine as such i s not new, and that there has been a considerable vending industry f or many years, not only i n North America but i n other parts of the world. A "Vending Machine" as defined by the Dominion Bureau of 2 S t a t i s t i c s i s "a device which automatically dispenses merchandise a f t e r a r e q u i s i t e amount of money i s inserted into the device". According to 3 Schreiber i n "Automatic S e l l i n g " , the f i r s t recorded automatic s e l l i n g machine was b u i l t about 219 B.C. by a Greek inventor to s e l l Holy Water to the worshippers i n the temples. S u r p r i s i n g l y , i t used the same basic p r i n c i p l e s t i l l employed by modern vending machines. Dominion Bureau of S t a t i s t i c s , Vending Machine Operators: 1973, Catalogue 63,213 (Ottawa), January, 1975. 3 Schreiber, G.R. Automatic S e l l i n g (New York: John Wiley & Sons, 1954). 3 There was no further h i s t o r i c or l i t e r a r y reference to mechanized s e l l i n g u n t i l the end of the 17th Century when tobacco vendors made t h e i r appearance i n London public houses. In other parts of Europe between 1800 and 1900, German, Scandinavian and English inventors introduced numerous models of coin-operated weighing scales, tobacco, gum and candy vending machines.^ The r e a l beginning of p r a c t i c a l automatic s e l l i n g i n the United States did not come u n t i l 1888 when Thomas Adams, the chewing gum manufacturer, had machines designed to s e l l h i s T u t t i - F r u i t t i gum on New York's elevated railway platforms. In the same year, the f i r s t postage stamp vendor was m a r k e t e d . F r o m that time on, there was a steady development of merchandising machines to dispense a v a r i e t y of goods and services u n t i l during the 1919-1929 period, when the vending industry experienced very a c t i v e growth. One of the greatest influences on t h i s growth was due to the f a c t that during the war, m i l i t a r y personnel had acquired the habit of ci g a r e t t e smoking and munching candy bars f o r a quick snack. These continued as habits even a f t e r the war. The beginning of World War II changed the character of automatic s e l l i n g and gave i t a new d i r e c t i o n . The period from 1940 to 1945 took automatic s e l l i n g out of the novelty category and f i r m l y established i t as a d e f i n i t e method of r e t a i l i n g . World War II with i t s long working hours i n industry, gave automatic merchandising an opportunity "Vending 17th Century Style", Vend Reprint N.D. "Highlights i n Vending History", Vend (January 1972), p. 188. 4 to prove the r e a l value of i t s service, e s p e c i a l l y i n the area of in-plant feeding. The need for around-the-clock snack service i n defense plants and the invention of the coffee machine i n 1946 paved the way for the rapid growth of in-plant vending. It was not u n t i l a f t e r the end of World War I I , however, that the automatic merchandising industry began to excite wide i n t e r e s t . Then came the development of new and improved machines, the extension of mechanical vending to such new f i e l d s as milk, hot coffee, f r u i t j u i c e , sandwiches, t o i l e t a r t i c l e s and hosiery, and s u b s t a n t i a l l y heightened entrepreneurial i n t e r e s t i n the promotion of what seemed to be a promising new f i e l d of r e t a i l enterprise. The next important milestone was the a v a i l a b i l i t y of coin changing mechanisms i n 1946 which gave automatic s e l l i n g the f l e x i b i l i t y i t had previously lacked. The appearance i n 1958 of d o l l a r b i l l changers further increased t h i s f l e x i b i l i t y . In 1956, hot canned food vendors ass i s t e d i n factory feeding and i n store-front vending. More recent developments have been the introduction of micro-wave ovens i n 1962 to heat r e f r i g e r a t e d foods from vendors, a c r e d i t card system i n 1965, and the "Vaudevendor" introduced.in 1971 to t e l l jokes. To further cater to the public needs, the National Cash Register Company i s now marketing a device c a l l e d the "Electr-Bar". This machine which mixes, pours and dispenses t h i r t y s i x d i f f e r e n t drinks as w e l l as s t r a i g h t shots, has proven to be quieter and more precise than a human thus allowing greater control on bar p r o f i t s . Unfortunately, i t cannot l i s t e n to the customer's problems and make an appropriately sympathetic reply. 5 In t h i s age of automation where more and more human services and a c t i v i t i e s are being replaced by machines, i t i s not s u r p r i s i n g that the rather tedious job of s e l l i n g should be mechanized and automated. I I I . HISTORY AND GROWTH OF VENDING AT U.B.C. The f i r s t vending machine at the U n i v e r s i t y of B r i t i s h Columbia was i n s t a l l e d i n 1956 i n the Physics b u i l d i n g . For 10c> a cup of instant coffee was dispensed with or without cream and/or sugar. Unfortunately, the vended product was unacceptable to many coffee drinkers because of the heavy, unpleasant taste of chicory which was added to the instant coffee powder to prevent i t from s o l i d i f y i n g i n the cannister. The next machine i n s t a l l e d on the campus was one which dispensed i n d i v i d u a l % p i n t cartons of milk. The cartons were conveyed to the opening of the machine on a b e l t which was triggered by the deposit of a 10£ coin. This machine also presented problems because wax from the bottom of the cartons tended to become deposited on the b e l t causing i t to s t i c k and preventing the milk from being dispensed. An "apple" machine located i n the War Memorial Gymnasium was the next to be added to the system. The students soon perfected the a r t of jamming the dispensing door of t h i s machine open with a coat hanger which allowed them to c o l l e c t apples without depositing any coins. In 1956, a p o l i c y governing vending machines was established by the Food Services Committee which required students to make known t h e i r vending needs to the Chariman of a Sub-Committee of the Food Services Committee. This Sub-Committee which included the Purchasing 6 Agent and the Director of Food Services, a f t e r r e c e i v i n g requests f o r the placement of vending machines, was responsible for obtaining the permission of the appropriate o f f i c i a l i n the areas concerned before machines could be i n s t a l l e d . During t h i s year, Vancouver Vending Company Limited, owned by Mr. Peter Graham, i n s t a l l e d a t o t a l of eleven machines at the U n i v e r s i t y of B.C. including the f i r s t c i g a r e t t e machine i n the Brock H a l l C a f e t e r i a . The f i r s t cold drink machine i n s t a l l e d was i n the basement of the C i v i l Engineering B u i l d i n g . I t offered only three selections - Coca Cola, Orange and Lemon-Lime. The vending business gradually became established. In the following year, 1957, Vancouver Vending Company i n s t a l l e d f i v e more machines - one cold drink machine i n the Law B u i l d i n g , one cold drink and one coffee machine i n the Armouries, and two c i g a r e t t e machines i n the basement of the Old Auditorium. In February, 1959, Vancouver Vending Company Limited sold out to P a c i f i c Automat Company which then took over the vending locat i o n s on campus for the following nine months. P a c i f i c Automat then amalgamated with West Coast Canteen and continued to service most of U.B.C.'s vending needs u n t i l 1968. By 1966, the Food Service Committee had ceased to e x i s t and the previous vending p o l i c y set up i n 1956 was no longer being enforced. The President's Committee on "Academic Goals for the Further Development of Decentralized Coffee Lounges and Common Rooms About the Campus", designed to f o s t e r small group discussions, requested that t h i s p o l i c y be reviewed and modified and that the U n i v e r s i t y adopt a new p o l i c y with respect to the i n s t a l l a t i o n and management of vending machines i n 7 University b u i l d i n g s . This p o l i c y stated that: 1. The Administrative Head, the "custodian of the b u i l d i n g " had to grant approval for any vending machines to be i n s t a l l e d . 2. The Purchasing Agent was responsible for the s e l e c t i o n of a supplier of the machines on a competitive basis and for i n s t a l l a t i o n arrangements. 3. The commissions accrue to the Food Services Department revenues except i n s p e c i f i e d buildings or areas (e.g. common rooms assigned to student s o c i e t i e s , student residences, Faculty Club). During the early years of vending at the U n i v e r s i t y , there were a number of independent operators supplying the vending se r v i c e s . Such was the s i t u a t i o n i n 1968 when i t was decided to put out to tender under one contract, the complete vending operation at U.B.C. This was the beginning of an organized vending enterprise on campus. Previous to 1968, there were a t o t a l of 39 machines on the campus. The tender requested a t o t a l of 55 machines. One reason for the increase i n the number of machines was the anticipated changeover of the c a f e t e r i a i n the Old Auditorium from a manually-operated service to a complete automatic vending operation. This one l o c a t i o n required an a d d i t i o n a l 12 machines. Vancouver Enterprises, incorporated on May 10, 1949, was the successful bidder for the vending operation and was awarded a three year contract with the s t i p u l a t i o n that e i t h e r party may upon 60 days written notice to the other, terminate the vending operation agreement provided there was good and s u f f i c i e n t reason. In 1971, the contract with Vancouver Enterprises was extended for a further three years and again i n 1974, for a further two years. Vancouver Enterprises Limited i s a pr i v a t e company, Mr. S. Hinton being the sole proprietor and the manager. 8 Under the present contract, Vancouver Enterprises Limited supplies vending machines to the various locations and takes complete r e s p o n s i b i l i t y f or f i l l i n g , s e r v i c i n g and maintaining them. In return for the l o c a t i o n and u t i l i t i e s required, i n d i v i d u a l departments i n the University receive commissions on sales as agreed to i n the contract. Under the general p o l i c y statement for vending machines, commissions are paid to the Food Services Department for those machines located i n areas other than i n the: Student Union Building Common Rooms assigned to Student Societies Faculty Club Panhellenic House Graduate Centre Student Residences From the f i r s t machine i n s t a l l e d i n 1956, the vending industry at the University of B r i t i s h Columbia has grown to a t o t a l of 150 machines (see Table 1) by 1974, i n d i c a t i n g the important part that c o i n -operated machines play i n the u n i v e r s i t y ' s r e t a i l i n g system. Table 1 Vending Machines at the Uni v e r s i t y of B.C. Type of Machine (1) Cold Drink Hot Drink Hot Food Candy Ice Cream Chips Phono Pastry All-Purpose L i t t o n Oven Cigarettes Sundries F r u i t Juices To t a l 1974 (2) 32 27 2 36 3 2 32 :3 3 150 1972 (3) 98 24 1970 (4) 4 + 17 21 3 29 • 4 4 1 1 9 1 24 1968 (5) 27 16 before 1968 (6) 26 13 127 118 43 39 Source: U.B.C. Purchasing Department CHAPTER II THE VENDING INDUSTRY I. WHY VENDING? Vending, as a potent retailing force owes much of i t s growing strength to such economic factors as shortages in certain segments of the labour market, rapidly rising food and labour costs, greater amounts of disposable incomes, shrinkage of the work week and year, need for these services during "after store hours", and the increased consumer demand for greater ease and convenience. Customer eating habits which are continuing to develop in favour of vending, provide a sufficient and an increasing demand for the type of snack and fast food service that vending can offer. Perhaps the main reason for automating any retailing function i s an economic one. Since labour has traditionally been a scarce factor of production, retailers are constantly seeking to lower operating costs through the introduction of labour-saving devices. In the food d i s t r i -bution industry, low gross margins usually prevail in which labour is one of the principal components of that margin. With rising labour costs, retailers must either increase gross margins or employ more efficient distribution methods. The higher that labour costs rise, the more desirable i t becomes to replace labour with capital (equipment). Vending machines are the most familiar form of automatic merchandising. To realize the remarkable development of automatic 10 11 merchandising, one needs only to look at a few key f i g u r e s . The number of machines i n use i n Canada has increased from 56,610 i n 1961 to an estimated 104,253 i n 1973. The volume of merchandise sold increased from about $45,000 i n 1961, to about $209,224,600 i n 1973 . Thus i n the l a s t decade alone, sales have more than t r i p l e d and the Industry has established i t s e l f as the f a s t e s t growing method of r e t a i l d i s t r i b u t i o n (see Figure I ) . This growth i s even more remarkable when one considers the vending industry i s based on the sale of r e l a t i v e l y few items (cigarettes, s o f t drinks and candy). In 1973, cigarettes alone accounted for 48% of the t o t a l sales, s o f t drinks 15% and coffee 15.5%. Together these items totaled over 78% of a l l vending sal e s . ^ The narrow product base of the vending industry i s being s t e a d i l y expanded by the development of new machines and operating techniques. Currently, the most r a p i d l y growing segment of the vending industry i s the on-premises feeding of factory and o f f i c e workers. Vending operators have moved into t h i s f i e l d with banks of machines that dispense hot and cold sandwiches, salad, soup, coffee and other hot dishes. One reason for the rapid growth of on-premises feeding i s the opportunity f or management to eliminate losses on c a f e t e r i a operations. Vending penetration of the restaurant business has been e s p e c i a l l y r a p i d . A vending operation i n a plant or o f f i c e can not only r e l i e v e management of the cost of su b s i d i z i n g a plant c a f e t e r i a , but the vending company frequently returns a percentage of the p r o f i t , thus a c t u a l l y making i t a p r o f i t a b l e i n s t a l l a t i o n . "Vending i n Canada 1973 - What And In What Order?", Canadian  Vending Magazine, ( A p r i l 1975), p.33. ^Dominion Bureau of S t a t i s t i c s , Vending Machine Operators: 1973, Catalogue 63,213 (Ottawa), January 1975. 12 The development of s e l f - s e r v i c e r e t a i l i n g has helped to condition consumers to the impersonal s e l l i n g i m p l i c i t i n s e l f - s e r v i c e r e t a i l i n g . Consumers are usually "presold". This i s accomplished p r i m a r i l y through adv e r t i s i n g which gives consumers information that aids s p e c i f i c s e l e c t i o n from among the myriad of other goods and brands offered. This preconditioning has helped to pave the way of vending as an acceptable r e t a i l i n g v e h i c l e . I I . SIZE OF THE INDUSTRY No one knows for c e r t a i n j u s t how large the current annual sales are. The industry has been growing too f a s t , and there have been too many small operations to permit the c o l l e c t i o n of accurate s t a t i s t i c s . The most r e l i a b l e industry estimates claim a current annual r e t a i l g sales volume through i t s machines of over two m i l l i o n d o l l a r s . To appreciate the actual volume that these d o l l a r s represent, i t must be kept i n mind that many of the items or services are vended at pr i c e s of 25(? or l e s s . The 1974 vended d o l l a r volume f or the U.S. was a 9 staggering $8,846,000,000. Because of the l i m i t a t i o n s of machine s e l l i n g and the natural i n c l i n a t i o n s of customers, there w i l l probably be no widespread replacement of e x i s t i n g restaurants, or even of employee c a f e t e r i a s . Instead, vending w i l l open up channels f o r sales that heretofore were l o s t because the human salesperson had f i n i s h e d h i s eight hour day or Dominion Bureau of S t a t i s t i c s , Vending Machine Operators: 1973, Catalogue 63,213 (Ottawa), January 1975. 9 "1974 Operating Ratio Study", Vending Times (June 1975), p. 13. 13 simply because he couldn't be i n every spot where the consumer might want him. I I I . LIMITATIONS OF VENDING Even though the "trend to vend" i s playing a bigger r o l e i n the f i e l d of r e t a i l i n g , there are obvious l i m i t a t i o n s to t h i s method of d i s t r i b u t i n g goods and se r v i c e s . Generally speaking, machines accept only coins. Apart from l i m i t i n g vending to the s e l l i n g p r i n c i p a l l y of goods priced under one d o l l a r , the p h y s i c a l act of i n s e r t i n g s i x or seven coins (for the more expensive items) i s a nuisance and may tend to influence many consumers not to patronize the vending machines. I t also creates a s i g n i f i c a n t coin change problem which adds to the already e x i s t i n g n a t i o n a l coin shortage. Canadian coinage with a s i l v e r content of which there i s s t i l l a considerable amount i n c i r c u l a -t i o n , continues to be withdrawn by entrepreneurs and shipped over the border to the U.S. where i t commands a premium. As a r e s u l t , shortages of Canadian coins have been experienced i n some l o c a l i t i e s , B.C. being one of them. To further add to the problem, Ottawa has recently brought out a new type of one d o l l a r b i l l , not nearly as r e a d i l y d i s t i n g u i s h a b l e as the old type green one i t replaces, and indeed quite s i m i l a r i n colouration to a twenty d o l l a r b i l l which, apart from the number of i t s denomination, i t greatly resembles. This new one d o l l a r b i l l does not work i n the present b i l l changers though with expenditure of money and labour, conversion k i t s can be f i t t e d to make them accept ,the new b i l l . Once converted, the changer w i l l then accept only the new b i l l . The problem of coin change has been and i s a d e f i n i t e l i m i t i n g f actor for a l l p r a c t i c a l purposes. With i n f l a t i o n r a p i d l y pushing the 14 10c drink and candy bar upwards to 20c and higher, the coin change problem w i l l become even more serious. As mentioned before, presold products are more vendible than those which are not. This, together with the lack of personal s e l l i n g , makes merchandise which i s n a t i o n a l l y or r e g i o n a l l y recognized (usually through advertising) easier to s e l l automatically. Consumers may not completely t r u s t the machine so they buy products whose brand names are known to them and whose packaging i s uniform. This can be a l i m i t i n g f a c t o r i n that these products may have a lower p r o f i t margin than a s i m i l a r product which does not have a b u i l t - i n brand acceptance. Perhaps the greatest si n g l e obstacle to automatic s e l l i n g was and i s the consumer's resistance, brought about i n many instances by a bad experience, such as machine u n r e l i a b i l i t y . However, as the public becomes more accustomed to using vending machines, and machines improve mechanically, t h i s resistance w i l l gradually y i e l d to necessity. IV. WHAT PRODUCTS VEND? For many years, automatic vending was l i m i t e d c h i e f l y to the sale of such items as cigar e t t e s and candy. These items are s t i l l of great s i g n i f i c a n c e . With 15% of a l l cigarettes now sold through machines'^, they represent the larges t d o l l a r volume for any one product sold by t h i s method. Today, milk, f r u i t and vegetable j u i c e s , shoe shines, i c e cream, postage stamps, s o f t drinks, insurance p o l i c i e s , hosiery, jewelry, hand-kerchiefs and novelties are only some of the products obtainable through P h i l l i p s , Charles F. and Duncan, Delbert J . Marketing:  P r i n c i p l e s and Methods, (4th ed.; Homewood, I l l i n o i s : Richard D.Erwin, 1960). 15 machines. Technological advancements i n quick freezing of foods, dehumidification and e l e c t r i c cooking have enabled operators to enter the frozen-foods business to serve hot sandwiches and beverages and to dispense complete meals. Even with the seemingly long l i s t of vendible products, there are s t i l l r e l a t i v e l y few products having the blend of conditions which make possible the a p p l i c a t i o n of machine s e l l i n g : a product small i n s i z e and weight, having a mass market, enjoying a high rate of frequency of purchase, and t r u l y a convenience item from the viewpoint of the customer. V. LOCATION Because many of the more adaptable convenience items have a high impulse value (e.g. ciga r e t t e s and candy) i t i s most important to locate machines i n areas frequented by a large number of people or where there i s heavy t r a f f i c , such as i n the U.B.C. l i b r a r y . I f because a machine i s there and the customer i s reminded that he would l i k e a quick refresher or a package of c i g a r e t t e s , the impulse sale can be an extra s a l e . The customer then buys because the machine i s handy. Vending machines are also located where consumers are "captive" or where people have a l i t t l e time on t h e i r hands (e.g. a bus stop or student lounge). These are the locations which usually have ei t h e r i n s u f f i c i e n t volume to support a personal s e l l i n g operation or serve as a supplement source of goods at peak t r a f f i c times. Because most operators do not have unlimited funds to buy an unlimited number of machines, the l o c a t i o n of the machines i s most important. The better the l o c a t i o n , the greater the income. r o •I 1 b I H J FIGURI T R Volume 1 Q AT WC WOT TTMT7 1 Q£1 1 $ 1 Jl ) in (} 1' ) I "OR L A I S A D A 1 v * j / / If 1 1 9 I ) i if 1 7f 1 L / I J 1 f n i -f 1 1 31 ) 1 '. f 1± 1 Tf \ 1 Jv I 1 Tf 1 ! 1— 1 1 ( 11 1 1 1 "If 1 _ / 1( 1 y( J °( _>i. 7f 1 /1 1 c.f / Jv 1 At "i 1 rH CM CO m vO 00 o V c > e c~ Year vO vO VO vO vO V£ > r as • as • CJN <T\ as as C V a o V c -\ 0> r i r H — -i i — i i—t t—t t— r- H T-H r-i c nnrf • Vending Machine Operator; 197 S t a t i s t i c r lanada. U U JL I 3 3 17 VI. VENDING TERMINOLOGY VENDING: a method of s e l l i n g goods which employs a vending machine to complete automatically a sales transaction upon i n s e r t i o n of coins by the customer. The d i s t i n c t i v e c h a r a c t e r i s t i c of vending i s the completion of a sales transaction without the a i d of a sales c l e r k . VENDING MACHINE: an automatic vending machine i s a mechanical device c o n s i s t i n g of a frame, merchandise trays, coin r e c e i v i n g s l o t , and coin shute, a slug r e j e c t o r u n i t , an a c t i v a t i n g mechanism which operates mechanically or e l e c t r i c a l l y to force a unit of goods from the merchandise tray to the rec e i v i n g tray and a cabinet. VENDING MACHINE OPERATOR: an i n d i v i d u a l or fir m that, on h i s or i t s own account owns or leases vending machines, places them and i s responsible f o r t h e i r s e r v i c i n g and r e p a i r . BULK VENDING: s e l l i n g of unpackaged goods such as peanuts and b a l l gum. COMMISSION: r e f e r s to r e n t a l paid by the operating company to the location-owner f o r the p r i v i l e g e of plac i n g the vending machine i n the owner's establishment. LOCATION: re f e r s to the establishment or s i t e i n which the machine i s placed. LOCATION-OWNER: r e f e r s to the i n d i v i d u a l or business concern which owns the l o c a t i o n . OPERATOR: i n d i v i d u a l or business organization which owns, locates, services and repairs vending service. ROUTE: l i s t of locatio n s c a l l e d upon by a service man. 18 SERVICING: p e r i o d i c replenishment of the supply of goods i n a machine, the c o l l e c t i o n of receipts and the inspection cleaning and minor adjustment of the machine. TRAFFIC: number of consumers passing the s i t e of the machine during a stated time i n t e r v a l . VENDER: commonly used as another name for the automatic vending machine. VII. NEED FOR THE STUDY Since the f i r s t vending machine was i n s t a l l e d at the Un i v e r s i t y of B r i t i s h Columbia i n 1956, "outside" vending operators have had the r e s p o n s i b i l i t y of the t o t a l vending operation. During the nearly 20 years that have ensued, t h i s operation has grown to over 150 machines with no doubt, more to be i n s t a l l e d i n the near future as the population and b u i l d i n g program expand. The question i s whether or not the un i v e r s i t y i s gaining maximum bene f i t s , both i n revenue and i n terms of service, by depending upon another organization to supply i t s vending needs. The operation of a vending enterprise by a university-owned service provides many advantages. Perhaps the greatest advantage of such a service i s that a "master plan" or "blueprint" can be established for keeping abreast with the u n i v e r s i t y ' s b u i l d i n g schedule. In the past and at present, there i s r a r e l y any pro v i s i o n made i n a new b u i l d i n g f o r any type of service, whether i t be a personally-attended food service or a battery of vending machines. These services are usually an a f t e r -thought a f t e r the b u i l d i n g i s completed and the need i s demonstrated. By t h i s time, the cost of supplying the u t i l i t i e s and space f o r such an area i s p r o h i b i t i v e . Also, i t may be s t r u c t u r a l l y d i f f i c u l t or 19 impossible to i n s t a l l such a service at t h i s point. If there were a master plan, provisions for some type of service, whether i t be vending or otherwise, could be incorporated at the planning stage which would reduce i n s t a l l a t i o n costs by providing for the f a c i l i t i e s i n advance. This master plan would also allow revenue to be predicted from the planned future s e r v i c e s . The next most important advantage, p a r t i c u l a r l y from the view-point of the U n i v e r s i t y Food Service Department, i s that the vending operation would serve as an "expander", making i t possible f i r s t l y , to produce more food f o r general campus d i s t r i b u t i o n , without a corres-ponding increase i n the investment i n basic kitchen equipment. Secondly, t h i s "expander" would make i t possible to adjust the operating hours of the various food service outlets by having machines i n or near them. The operating hours could be reduced i n a labour saving measure when the volume of business i s low, and the machines would then render the s e r v i c e . So i n e f f e c t , more food would be a v a i l a b l e at more places for more hours each day. This i s necessary since the campus i s spread over 1,000 acres with 750 buildings and a present population of over 27,000 with only 12 food outlets to service these needs. Vending i s also the ready-made answer to the "stretched academic day" which i s f i n d i n g classes beginning early i n the morning and continuing on through l a t e afternoon and into the night. Classes are also held on week-ends when most campus food f a c i l i t i e s operate on l i m i t e d hours or are closed. Night school enrollment continues to r i s e and since there are no food f a c i l i t i e s operating a f t e r 7:00 p.m., these students r e l y s o l e l y upon vending machines for snacks and beverages. 20 At present, the vending company purchases food items f o r the all-purpose merchandiser machines from various sources, one being the Central Commissary Kitchen of the Uni v e r s i t y . By concentrating a l l food preparation a c t u a l l y within the Central Kitchen, there would be les s d i f f i c u l t y i n seeing that the standards of q u a l i t y and p r i c e are met with regard to the food i t s e l f and the manner i n which i t i s prepared and turned over i n the machine. By having complete c o n t r o l of the vended food and refreshment operation, complete q u a l i t y and quantity c o n t r o l at every step of the way i s insured. This means that ordering, preparation of the products, d i s t r i b u t i o n and revenue are a l l under the u n i v e r s i t y ' s d i r e c t supervision. Records c e n t r a l l y maintained would also a i d i n th i s desired c o n t r o l . Through i n v e s t i g a t i o n i t was determined that the u n i v e r s i t y can purchase various supplies as cheaply or even cheaper than a vending operator because of the s u b s t a n t i a l q u a n t i t i t e s of goods already being purchased from the same suppliers. This purchasing power by the un i v e r s i t y would enable i t to buy at the lowest possible p r i c e s . When the machines are owned and operated by a u n i v e r s i t y , the vending administrator has greater freedom i n s h i f t i n g the machines. The mix of the machines can also be changed for higher-available return. Under the present s i t u a t i o n , the vending company deals with each i n d i v i d u a l department, placing the type and number of machines requested by that department, sometimes without regard to the r e a l needs. Another advantage of a university-owned vending operation i s that a u n i v e r s i t y with i t s own servicemen has maintenance service a v a i l a b l e on campus. I t can arrange the work schedule and have coverage on a f i v e , 21 s i x or seven day b a s i s . This, of course, gives a u n i v e r s i t y a great deal of f l e x i b i l i t y and also gives i t a greater opportunity to provide better service. The operation of a vending enterprise allows a c e r t a i n amount of student employment e s p e c i a l l y i f a student i s r e l i a b l e and mechanically i n c l i n e d . Student employees make the vending s t a f f f l e x i b l e . Since the sales volume i s d i r e c t l y linked to the number of students on campus, i t i s p ossible to adapt the s i z e of the s t a f f to the current requirements by the employment of students. By maintaining a "core" of vending s t a f f employees, and by adding or l a y i n g o f f the students according to the sales volume, there i s le s s need to constantly lay o f f and r e h i r e permanent employees which i s c o s t l y to the operation. Besides helping to reduce labour costs, the vending operation gives an a d d i t i o n a l o u t l e t f or student employment. At the present time, Vancouver Enterprises does not h i r e any students. The routemen of the company are members of Mis-cellaneous Workers, Wholesale and R e t a i l Delivery Drivers and Helpers Union, Local 351, a f f i l i a t e d with the International Brotherhood of Teamsters. Many of the vending machines on campus are older machines which have been renovated and repainted. They require a higher degree of maintenance and may often r e s u l t i n frequent service disorders. These older vintage machines usually o f f e r a more l i m i t e d service than do the newer models (e.g. no i c e i n the cold d r i n k ) . Perhaps the primary need for t h i s study i s the urgent need for the Food Services Department to explore other sources of revenue. No one i s so naive to doubt that there i s a great deal more involved i n the 22 successful operation of the vending machines than the mere buying, l o c a t i n g and stocking of the machines. I t must be kept i n mind, therefore, that a u n i v e r s i t y , regardless of whether i t employs an outside vendor or operates i t s own enterprise, w i l l receive complaints about the s e r v i c e , about l o s t coins and about the products i n the machine. I t w i l l have as many, or possibly more headaches operating i t s own vending, but i t can do more about the complaints than i f the operation i s performed by an outside concern. CHAPTER I I I THE INVESTIGATION I. THE INVESTMENT PROPOSAL It i s my in t e n t i o n to study i n depth the vending operation at the Un i v e r s i t y of B r i t i s h Columbia with the purpose of determining the economic f e a s i b i l i t y of the U.B.C. Food Services Department undertaking t h i s operation based on f i n a n c i a l acceptance c r i t e r i a . I I . DESIGN OF THE INVESTIGATION One of the f i r s t e s s e n t i a l s i n determining the economic f e a s i -b i l i t y of the future operation of the vending enterprise, i s to forecast future sales. Before attempting a forecast, i t was necessary to e s t a b l i s h a c e r t a i n h i s t o r i c a l perspective. The vending sales of each of the major products sold through U.B.C. vending machines (e.g. c i g a r e t t e s , cold drinks, hot drinks, candy) were reviewed over the past f i v e years and future vending a c t i v i t i e s were projected from t h i s base through the next f i v e years. Projections include the sales f o r each product, the t o t a l purchases, t o t a l cash r e c e i p t s , gross p r o f i t s , operating expenses and the net cash balances for each year. Forecasts made of product sales i n p h y s i c a l units on a per capita basis were based on the Department of Academic Planning's forecast on student enrollment. This forecast consisted of two estimates - a high estimate and a low estimate. Therefore, each subsequent forecast made for th i s study i s based on a high and a low estimate to p a r a l l e l that made by the Department of Academic Planning. 23 24 Chapter V analyzes the i n i t i a l c a p i t a l outlay that would be required to set up the operation as i t now ex i s t s and discusses the means by which t h i s c a p i t a l investment would be financed. The projected cash receipts and cash disbursements are examined i n order to a r r i v e at an annual cash balance. The cash budget covers a period of f i v e years from September 1975-August 1976 to September 1979-August 1980. By the use of the present-value method approach the cash flows are discounted to present values, using an assumed required rate of return. From t h i s , the decision i s made whether or not the investment proposal should be accepted or rejected. In Chapter VI, the revenue of future commissions earned by the Food Service Department (under the present arrangement) i s forecasted and i s compared to the revenues that the department would receive i f i t undertook the operation. F i n a l l y , Chapter VII looks b r i e f l y at the future of vending • and possible areas of further research. I I I . ASSUMPTIONS Any economic p r o j e c t i o n such as t h i s one c a r r i e s with i t a multitude of assumptions. For purposes of t h i s study the following assumptions are made: 1. Uni v e r s i t y Population - the r e l a t i o n s h i p of f a c u l t y and s t a f f members to student enrollment w i l l continue to be i n the range of 8 - 9% and 16 - 17% re s p e c t i v e l y . 25 2. Commission Rates - w i l l continue to be the same as at present. That i s : 7% of gross sales f or candy 25% of gross sales f or cold drinks 15% of gross sales f o r hot drinks 5.04c & 3<? a package for cigarettes 3. Vending Machines - there w i l l be no increase i n the type, number or l o c a t i o n of machines i n the system. 4. The s i z e , rate and nature of sales w i l l continue i n the future as i t has i n the past, or what has affected sales i n the past w i l l continue to a f f e c t sales - and i n the same way - over future months and years. 5. The r e l a t i o n s h i p between i n f l a t i o n , p r i c e changes i n products and operating expenses and s e l l i n g p r i c e w i l l remain the same. 6 . The r e t a i l i n g p r ices are f i x e d . 7. The Cost of Goods Sold prices are f i x e d . 8. The Un i v e r s i t y of B r i t i s h Columbia w i l l continue to administer and operate i t s own food s e r v i c e department. 9 . The student enrollment estimate made by the U.B.C. Department of Academic Planning proves to be reasonably accurate. 10. There w i l l be no great changes i n the economy or i n the vending industry that w i l l have major e f f e c t s on the vending operation at the U n i v e r s i t y of B r i t i s h Columbia. CHAPTER IV FORECASTING I. GENERAL DISCUSSION OF FORECASTING In determining i f an investment proposal i s an acceptable one, i t i s necessary to have more than j u s t a vague idea of what the future holds for the operation. Accurately forecasting future events such as vending sales i s a hazardous undertaking i n any industry i n t h i s modern era of rapid change and i n f l a t i o n . Although forecasts are sometimes made as though the v a r i a b l e to be forecast w i l l , or w i l l not, a t t a i n a p a r t i c u l a r value, complete accuracy i s not to be expected. The value of forecasting l i e s i n i t s a p p l i c a b i l i t y i n that i t enables better decisions to be made. One way of reducing the margin of error i s to have a short fore-casting period. Accuracy i s a decreasing function of the span of the forecast because the farther one projects into the future, the greater the chance of error. Even i f the data input i s accurate, there i s s t i l l no assurance that the basic r e l a t i o n s h i p between vending sales and the variables that explain sales w i l l hold, for we l i v e i n a dynamic society and new v a r iables are always impinging upon established r e l a t i o n s h i p s . In many quarters, f i v e years i s considered to be the longest forecast period i n which any confidence can be put. For t h i s reason and the f a c t that the student enrollment i s projected for a period of f i v e years, vending sales i n t h i s study are also projected for a period of f i v e years. 26 27 This p r o j e c t i n g problem i s made even more d i f f i c u l t by the f a c t that at present there are only f i v e years of h i s t o r i c a l data from which to derive r e l a t i o n s h i p s for a f i v e year forecast. With such a short period, i t i s quite easy to c a l c u l a t e trends which may simply be " o p t i c a l i l l u s i o n s " or may only p a r t l y account for the f a c t s . In order to pick out long-term trends, quite long periods of data are needed i n which c e r t a i n factors are stable and s p e c i f i c general conditions are maintained. Irregular and f a s t growth lends i t s e l f much les s r e a d i l y to forecasting. "Forecasting, (as defined by Chambers, Mu l l i c k and Smith i n "An Executive's Guide to Forecasting") i s looking at what happened i n the past and attempting to project t h i s h i s t o r i c a l experience i n the future." Even though there i s a great v a r i e t y of forecasting methods, there i s ho forecasting method presently known which gives uniformly accurate r e s u l t s with i n f a l l i b l e p r e c i s i o n . The view that economic events can be forecast depends upon the seemingly reasonable assumption that these events have some cont i n u i t y and that the s i z e , rate and nature of h i s t o r i c a l change w i l l continue into the future. A time series i s a sequence of values corresponding to p a r t i c u l a r periods of time and i t i s to t h i s c l a s s i f i c a t i o n that the method of trend p r o j e c t i o n belongs. This method i s perhaps the most common method used by business firms because economic seri e s e x h i b i t a p e r s i s t e n t and c h a r a c t e r i s t i c rate of growth which can be approximated by a mathematical trend. One of the major advantages of t h i s trend approach i s that the computations can be accomplished rather quickly and with a minimum of experimentation. Another advantage i s that t h i s method does not have to r e l y upon external or outside data. This can 28 also be a disadvantage at the same time because i n many cases, factors outside the data ser i e s can be used to help predict the rate and d i r e c t i o n of movement of the s e r i e s . Another disadvantage of using t h i s method i s that when the analyst extrapolates, he i s assuming that what affected sales i n the past w i l l continue to a f f e c t sales - and i n the same way - over future months and years. This assumption i s not always warranted. The trend method encompasses a number of techniques. The technique employed i n t h i s p r o j e c t i o n involves mathematically f i t t i n g an appropriate l e a s t squares trend l i n e to h i s t o r i c a l data and p r o j e c t i n g i t forward. However, i n t h i s technique, as i n a l l others used i n the trend method, there i s the i m p l i c i t assumption that those factors which a f f e c t vending sales are highly correlated with time and w i l l continue to be i n the future. The purpose i n forecasting the vending sales i s to attempt to project the p r o f i t a b i l i t y of the vending operation at the U n i v e r s i t y of B.C. Sales are expressed i n p h y s i c a l terms rather than i n d o l l a r values i n order to minimize the e f f e c t s of unpredictable influences such as i n f l a t i o n and p r i c e increases i n the products and operating expenses. There i s a forecast for each major group of products (candy, cold drinks, hot drinks, cigarettes) as w e l l as for the u n i v e r s i t y population. I I . THE UNIVERSITY POPULATION For the purposes of t h i s study, the U n i v e r s i t y Population consists of registered students, f a c u l t y and s t a f f members of the U n i v e r s i t y of B r i t i s h Columbia. 29 Using a combination of assumptions, the Department of Academic Planning at the Univ e r s i t y of B.C. ar r i v e d at two estimates f o r the U.B.C. student enrollment f o r the years 1975 to 1979, a "high" estimate and a "low" estimate. These two estimates were used as a base to project the u n i v e r s i t y population. It was necessary to look at the t o t a l population of the u n i v e r s i t y rather than at j u s t the number of students i n attendance because everyone within the confines of the u n i v e r s i t y area, i s a p o t e n t i a l customer. No u n i v e r s i t y vending or food service i s l i m i t e d to serving only students. As seen i n Table 2, the number of f a c u l t y ranges between 8 and 9% of the student enrollment and the number of s t a f f members ranges between 14 and 17%. The projected u n i v e r s i t y population was then derived by adding to the estimated student enrollment, 16% of the estimated enrollment f o r the estimated number of s t a f f members, and 8^% of the estimated enrollment f o r the estimated number of f a c u l t y members. Table 4 shows the estimate of the u n i v e r s i t y population using as a base the Department of Academic Planning's "high" estimate and Table 5 shows the "low" estimate. 30 Table 2 University Population for the Years 1970-71 to 1974-75 Student Faculty Staff T o t a l Year Enrollment No. of % of No. of % of Population Faculty Enrollment Staff Enrollment (1) (2) (3) (4) (5) (6) (7) 1970- 71 20,940 1,630 8% 2,950 14% 25,520 1971- 72 19,826 1,770 9% 3,150 16% 24,746 1972- 73 19,166 1,785 9% 3,320 17% 24,271 1973- 74 20,100 1,870 9% 3,450 17% 25,420 1974- 75 22,035 1,875 8*2% 3,560 16% 27,470 Sources: Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 O f f i c e of the Registrar, U.B.C. Personnel Department, U.B.C. Col. (3) divided by Col. (2). Personnel Department, U.B.C. Col. (5) divided by Col. (2). Col. (2) plus Col. (3) plus Col. (5) 31 Table 3 Projection for Student Enrollment at U.B.C. for the Years 1975-76 to 1979-80 Year High Estimate Low Estimate (1) (2) (3) 1975-76 23,640 22,169 1976-77 25,095 22,815 1977-78 26,594 23,555 1978-79 28,005 24,330 1979-80 28,997 24,899 Sources: Column 2: Column 3: Department of Academic Planning, U.B.C. Department of Academic Planning, U.B.C. F I G l r : [ R E 1— OF [JNIVER b b l l M A i J s i n P n . a t i o i 1 39 r n n —1 r 0 0 JO, 3" 7 r 0 0 ' 1 3( r n n T >) \ 3 5 , r 0 0 1 •V J 71 r n n i 1 > u / / — 77 0 n n 1 / 3; > 0 0 0 / - » / 1 3] 0 nn - J u / / 3( s n 0 n / 1 X •> j <J U / » I J » 1 • ?c } n n / 1 L u U / * * / / • ?/ J n n n / 5 > u / / » / ?• c n n / • • • — c n n _L j > • H: L e h E s t : i m a t e T.rn* 7 F.sf i m a f p 7 c: r> — Ai-t-nal n n n 1-1 -1 c 0 CO 1 1 • ^ • • • 1 1 Li U ZCLJL 0 1 01 ro * U 1 \0 00 as r-. r~ « r - r- r^ -as ON OS Os c c > as as 1-1 r- 1 1—1 i—1 r—( H I-H 1—1 1—1 J 1 33 Table 4 Estimate of Uni v e r s i t y Population for Years 1975-76 to 1979-80 High Estimate Year Student No. of Faculty No. of Staff T o t a l Enrollment (8*5% of Enrollment) (16% of Enrollment) Population (1) (2) (3) (4) (5) 1975- 76 23,640 2,009 3,782 29,431 1976- 77 25,095 2,133 4,015 31,243 1977- 78 26,594 2,260 4,255 33,109 1978- 79 28,005 2,380 4,481 34,866 1979- 80 28,997 2,465 4,640 36,102 Sources: Column 2: Department of Academic Planning, U.B.C. Column 3: Col. (2) m u l t i p l i e d by .085. See Col. (4) Table 2. Column 4: Col. (2) m u l t i p l i e d by .16. See Col. (6) Table 2. Column 5: Col. (2) plus Col. (3) plus Col. (4). 34 Table 5 Estimate of University Population for Years 1975-76 to 1979-80 Low Estimate Year Student Enrollment No. of Faculty No. of Sta f f (8Jg% of Enrollment) (16% of Enrollment) T o t a l Population (1) (2) (3) (4) (5) 1975-76 22,169 1,884 3,547 27,600 1976-77 22,815 1,939 3,650 28,404 1977-78 23,555 2,002 3,769 29,326 1978-79 24,330 2,068 3,893 30,291 1979-80 24,899 2,116 3,984 30,999 Sources: Column 2: Department of Academic Planning, U.B.C. Column 3: Col. (2) m u l t i p l i e d by .085. See Col. (4) Table 2. Column 4: Col. (2) m u l t i p l i e d by .16. See Col. (6) Table 2. Column 5: Col. (2) plus Col. (3) plus Col. (4). 35 I I I . PER CAPITA CONSUMPTION OF VENDED PRODUCTS The vending sales f o r only the major products sold through vending machines at the University of B r i t i s h Columbia (ci g a r e t t e s , cold drinks, hot drinks, candy) w i l l be considered i n t h i s study. The combined sales of the other products (ice cream, hot food, all-purpose merchandized foods) account f o r less than 1% of the t o t a l vending sales. Canned f r u i t j u i c e sales are expanding, but since they have been introduced to the product l i n e f o r only about one year, there i s not s u f f i c i e n t h i s t o r i c a l data a v a i l a b l e to predict a future trend i n sales. Data was gathered for the period September 1970 to August 1975 for the sales of each vending machine whose commission i s awarded to the Food Services Department (see Appendix A-l) and for the period September 1973 to August 1975 for the sales of each machine whose commission i s paid to an Undergraduate Society (see Appendix B). Data previous to these two periods i s not a v a i l a b l e . These two sources account f o r 83% of the machines on Campus. The remaining 17% of the machines are i n locations such that an account of past data i s not on record or a v a i l a b l e . These locations include the i c e arena, r e l i g i o u s colleges and the Residence canteens. The Alma Mater Society with i t s governing executive, the Students' Council, controls a l l student a c t i v i t i e s and administers the accounts f o r the Undergraduate S o c i e t i e s . Commissions paid to these S o c i e t i e s are sent to the Alma Mater Society for c r e d i t d i s t r i b u t i o n to the respective accounts. This study uses one category (Alma Mater Society) to represent a l l the accounts for which i t administers. 36 By d i v i d i n g the t o t a l population by the t o t a l number of p h y s i c a l units of each vended product, a per capita consumption for each period was calculated (see Appendix C)• Using the method of l e a s t squares, estimates (both high and low) were made of the number of units of c i g a r e t t e s , cold drinks, hot drinks and candy sold through the Food Services Department-commissioned machines for the period September 1975 to August 1980 (see Tables 6 through 13). 37 Table 6 Estimated Number of Packages of Cigarettes Sold Through Food Services Department-Commissioned Machines f o r the Period September 1975 to August 1980 Using the High Estimate • Year Population Per Capita Consumption No. of Pkgs. (1) (2) (3) (4) 1975-76 29,431 1.73 50,916 1976-77 31,243 1.38 43,115 1977-78 33,109 1.03 34,102 1978-79 34,866 .68 23,709 1979-80 36,102 .33 11,914 Sources: Column 2: From Table 4 Column 3: Appendix D-lb Column 4: Col. (2) m u l t i p l i e d by Col. (3). Table 7 Estimated Number of Packages of Cigarettes Sold Through Food Services Department-Commissioned Machines f o r the Period September 1975 to August 1980 Using the Low Estimate Year Population Per Capita Consumption No. of Pkgs. (1) (2) (3) (4) 1975-76 27,600 1.73 47,748 1976-77 28,404 1.38 39,198 1977-78 29,326 1.03 30,206 1978-79 30,291 .68 20,598 1979-80 30,999 .33 10,230 3 8 FIGDl IE TT T I ESTIMATED CIGARETTES CAT UC PE1 } r ATJTTA \ L ) THROUG H ~] FOOD SERVICE-( : o w MIS! 3 ION E D VE NDING MA S i J lb k s + 1 Numt er Dt r racsage 3 C r Lgarettes ; -* • 3 v. s -} T Estimate< 1 S ali • J > N. A 2 t u a l Sale s tt. s 9 5 _ U 1 z. _ 0 1 1 T * v J •i. 1 i N \ 1 X. * H> ; X I •— N i— ) s ( ) 1 J c -J U 1 vO 00 ON o r r* >- r~ r- ! rj. co Yea- — i r—1 1 i 1 CO IS V t r 1 1 CO ~j~ r- r- r- rij ' i—. UN C •\ c hi o > ON C N ON ON c •N ON _ rH r- i— 1 rH rH rH rH rH I H rH _ j 39 Table 8 Estimated Number of Cups of Cold Drinks Sold Through Food Services Department-Commissioned Machines f o r the Period September 1975 to August 1980 Using the High Estimate Year Population Per Capita Consumption No. of Cups (1) (2) (3) (4) 1975-76 29,431 7.81 229,856 1976-77 31,243 8.44 263,691 1977-78 33,109 9.07 300,299 1978-79 34,866 9.70 338,200 1979-80 36,102 10.33 372,934 Table 9 Estimated Number of Cups of Cold Drinks Sold Through Food Services Department-Commissioned Machines f o r the Period September 1975 to August 1980 Using the Low Estimate Year Population Per Capita Consumption No. of Cups (1) (2) (3) (4) 1975-76 27,600 7.81 215,556 1976-77 28,404 8.44 239,730 1977-78 29,326 9.07 265,987 1978-79 30,291 9.70 293,823 1979-80 30,999 10.33 320,220 Sources: Column 2: From Table 4 Column 3: Appendix D-2b Column 4: Col. (2) m u l t i p l i e d by Col. (3). 4 n 1 I V T ESTIMATED COLE SAT.TP.R PP. fAPTTi \ J SOLI ) T HROUGH FUUD SERVICE - JUMHISSIUNEU fENDlNl MALI ti 1 IN £•& i l U Number or ~ of Cold Drinks / i n \r\\ —rH— / / - r . 1 1 _ _ > Q n * y • u —' t t ; / 0 0 / 0 • t J -f / ! 1 / 7 n / r / • u / 1/ / / / / / y o V i L , \\ j /\ 1 I t _ s ales r --/ / —|— t C n - • / L • • \ / r-^ cn iO VO r 00 c c r- I 1 r^ -1 r— 1 1 r | o D Year c r-5 i -r-H CM cn u-i r^. \D i — c r 0 o> o o o> Jdti C CTi C CT\ o> i H r-^ r H r H r H r H r H r H r H r H 1— — r r ± r 1 1 1 41 Table 10 Estimated Number of Cups of Hot Drinks Sold Through the Food Services Department-Commissioned Machines for the Period September 1975 to August 1980 Using the High Estimate Year Population Per Capita Consumption No. of Cups (1) (2) (3) (4) 1975-76 29,431 16.91 497,678 1976-77 31,243 19.06 595,492 1977-78 33,109 21.25 703,566 1978-79 34,866 23.44 817,259 1979-80 36,102 25.63 925,294 Table 11 Estimated Number of Cups of Hot Drinks Sold Through the Food Services Department-Commissioned Machines f o r the Period September 1975 to August 1980 Using the Low Estimate Year Population Per Capita Consumption No. of Cups (1) (2) (3) (4) 1975-76 27,600 16.91 466,716 1976-77 28,404 19.06 541,380 1977-78 29,326 21.25 623,177 1978-79 30,291 23.44 710,021 1979-80 30,999 25.63 794,504 Sources: Column 2: Table 4 Column 3: Appendix D-3b Column 4: Col. (2) m u l t i p l i e d by Col. (3) 4 ? ov T r ML V E ST1MATED 1 UKlINK bALEb rEK (JAr IT/ —• SOLI ) THROUGH FOOE SERVICE -( :OMMISSIONE D VENDING MACHINES N uin >r n F Cuj 1— — J Z > w ±-)rinki not 1. i r [ i—f— 28.C — 2 S.C — / r i 2 4 . 1 i -/ J 2 y / i / / / -f 2 — h 0 c i / / —j— — / » — 1 8 ( O.v ) > • / — j / , 4 • / 1 6.C ) IJZL — T T • J- L — 1 4 . 0 12 10 . 0 8 . 0 6 . 0 Year Estimated Sales Actual Sales r-H CM on r-~ r~. i TCT 1 O i—I CM r-» as as as vO oo oo in vo r-. r - r--as as as I oo as as rH o 00 I as ON 43 Table 12 Estimated Number of Candy Bars Sold Through the Food Services Department-Commissioned Machines for the Period September 1975 to August 1980 Using the High Estimate Year Population Per Capita Consumption No. of Bars (1) (2) (3) (4) 1975-76 29,431 14.19 417,626 1976-77 31,243 15.96 498,638 1977-78 33,109 17.73 587,023 1978-79 34,866 19.50 679,887 1979-80 36,102 21.27 767,890 Table 13 Estimated Number of Candy Bars Sold Through the Food Services Department-Commissioned Machines f o r the Period September 1975 to August 1980 Using the Low Estimate Year Population Per Capita Consumption No. of Bars (1) (2) (3) (4) 1975-76 27,600 14.19 391,644 1976-77 28,404 15.96 453,328 1977-78 29,326 17.73 519,950 1978-79 30,291 19.50 590,675 1979-80 30,999 21.27 659,349 Sources: Column 2: Table 4 Column 3: Appendix D-4b Column 4: Col. (2) m u l t i p l i e d by Col. (3) 45 By examining the tables i n Appendix B, i t i s evident that of the t o t a l vending sales for the years 1973-74 and 1974-75, the Alma Mater Society machines accounted for approximately 17% of the c i g a r e t t e sales, 38% of the cold drink sales, 37% of the hot drink sales and 39% of the candy sales. Since data i s a v a i l a b l e f o r only these two years f o r the Alma Mater Society machines, i t w i l l be necessary to assume for analysis that there w i l l continue to be the same proportion of sales (A.M.S. to Food Services Department) as i n these two years and that the t o t a l vending sales w i l l follow the same trend as shown by the Food Services Department sales f o r the periods 1970-71 to 1974-75 i n c l u s i v e . Using as the basis the estimated sales figures from tables 6 through 13, i t i s now possible to ca l c u l a t e the t o t a l vending sales f o r the period 1975-76 to 1979-80. For example, i f the estimated c i g a r e t t e sales for the Food Services machines i s 50,916 packages for 1975-76 and t h i s represents 83% of the t o t a l vending sales, then the t o t a l number of packages of cigarettes estimated to be sold would be 61,345. The same method of c a l c u l a t i o n could be used for estimating the other vending products. 46 Table 14 Tota l Vending Sales for the Period 1975-76 to 1979-80 High Estimate Year Cigarettes # of Pkgs. Cold Drinks # of Cups Hot Drinks # of Cups Candy //of Bars (1) (2) (3) (4) (5) 1975-76 61,345 370,736 789,965 684,633 1976-77 51,946 425,308 945,225 817,439 1977-78 41,087 484,353 1,116,771 962,333 1978-79 28,565 545,484 1,297,237 1,114,569 1979-80 14,354 601,506 1,468,721 1,258,836 Sources: Column 2: This t o t a l represents 83% Food Services Department sales and 17% A.M.S. sales. Column 3: 62% are Food Services Dept. sales and 38% are A.M.S. sales. Column 4: 63% are Food Services Dept. sales and 37% are A.M.S. sales. Column 5: 61% are Food Services Dept. sales and 39% are A.M.S. sales. 47 Table 15 Tot a l Vending Sales for the Period 1975-76 to 1979-80 Low Estimate Year Cigarettes # of Pkgs. Cold Drinks # of Cups Hot Drinks # of Cups Candy # of Bars (1) (2) (3) (4) (5) 1975-76 57,528 347,671 740,819 642,039 1976-77 47,227 386,661 859,333 743,161 1977-78 36,393 429,011 989,171 852,377 1978-79 24,817 473,908 1,127,017 968,320 1979-80 12,325 516,484 1,261,117 1,080,900 Sources: See Table 14. 48 IV. COST OF GOODS SOLD In order to estimate the cost of goods sold, i t was necessary to obtain information on pr i c e s from the various firms which already supply the Univ e r s i t y of B r i t i s h Columbia, and from those firms which supply vended products to accounts other than to t h i s u n i v e r s i t y . The prices adopted for purposes of analysis were those quoted by firms which were competetive and had a h i s t o r y of r e l i a b i l i t y of d e l i v e r y and service. The reader i s reminded that the prices are assumed fi x e d throughout the period of the study. As w e l l as coffee, the hot drink machine vends hot chocolate and soup. However, since almost a l l of the sales i n these machines are i n the form of coffee, for purposes of ana l y s i s , the hot drink sales w i l l be calculated as coffee sales. Table 16 Cost of Goods Sold Per Serving Vended Product Component Cost Per Serving T o t a l Cost per Serving (1) (2) (3) Cigarettes $ .50 $ .50 Cold Drink Syrup Cup $.075 .005 .08 Hot Chocolate Syrup Cup . 03 . 01 .04 Soup Powder Cup .016 . 01 .026 Chocolate Bar Bar .14 .14 49 Table 17 Estimated Cost of Goods Sold for Vending Products High Estimate Year Cigarettes Cold Drinks Hot Drinks Candy Tot a l (1) (2) (3) (4) (5) (6) 1975-76 $30,672.50 $29,658.90 $37,918.32 $ 95,848.60 $194,098 1976-77 25,973.00 34,024.60 45,370.80 114,441.50 219,810 1977-78 20,543.50 38,748.20 53,605.01 134,726.60 247,623 1978-79 14,282.50 43,638.70 62,267.38 156,039.70 276,228 1979-80 7,177.00 48,120.50 70,498.61 176,237.00 302,033 Sources: Column 2: Estimated number of cigaret t e s sold times cost p r i c e of 50C. Column 3: Number of cold drinks times cost p r i c e of 8<?. Column 4: Number of hot drinks times cost p r i c e of 4 . 8 c Column 5: Number of bars times cost p r i c e of 14£. Column 6: Col. (2) plus Col. (3) plus Col. (4) plus Col. (5 ) . 50 Table 18 Estimated Cost of Goods Sold for Vending Products Low Estimate Year Cigarettes Cold Drinks Hot Drinks Candy To t a l (1) (2) (3) (4) (5) (6) 1975-76 $28,764.00 $27,813.70 $35,559. 31 $ 89,885. 50 $182,023 1976- 77 23,613.50 30,932.90 41,247. 98 104,042. 50 199,837 1977-78 18,196.50 34,320.90 47,480. 21 119,332. 80 219,330 1978-79 12,408.50 37,912.60 54,096. 82 135,564. 80 239,983 1979-80 6,162.50 41,318.70 60,533. 62 151,326. 00 259,341 Sources: See Table 17. 51 V. CASH RECEIPTS The amount of anticipated income for the vending operation was calculated by taking the present s e l l i n g p r i c e of the various vending products and multip l y i n g these prices by the estimated number of units s o l d . The prices are as follows: Package of cigarettes 70<? Cup of Cold Drink 15C Cup of Hot Drink 15c Chocolate Bar 20c Table 19 Estimated Cash Receipts from Vending Sales for the Period September 1975 to August 1980 - High Estimate Year Cigarettes Cold Drinks Hot Drinks Candy To t a l (1) (2) (3) (4) (5) (6) 1975-76 $42,941.50 $55,610.40 $118,494.75 $136,926.60 $353,973 1976-77 36,362.20 63,796.20 141,783.75 163,487.80 405,430 1977-78 28,760.90 72,652.95 167,515.65 192,466.60 461,396 1978-79 19,995.50 81,822.60 194,585.55 222,913.80 519,317 1979-80 10,047.80 90,225.90 220,308.15 251,767.20 572,349 Sources: Column 2: Estimated number of cigare t t e s sold times s e l l i n g p r i c e of 70£. Column 3: Estimated number of cold drinks times 15c. Column 4: Estimated number of hot drinks times 15<?. Column 5: Estimated number of chocolate bars times 20c. Column 6: Col. (2) plus Col. (3) plus Col. (4) plus Col (5). 52 Table 20 Estimated Cash Receipts from Vending Sales f o r the Period September 1975 to August 1980 - Low Estimate Year Cigarettes Cold Drinks Hot Drinks Candy Tot a l (1) (2) (3) (4) (5) (6) 1975-76 $40,269.60 $52,150.65 $111,122.85 $128,407.80 $331,951 1976-77 33,058.90 57,999.15 128,899.95 148,632.20 368,590 1977-78 25,475.10 64,351.65 148,375.65 170,475.40 408,678 1978-79 17,371.90 71,086.20 169,052.55 193,664.00 451,174 1979-80 8,627.50 77,472.60 189,167.55 216,180.00 491,448 Sources: See Table 19. 53 VI. ESTIMATED GROSS PROFITS FOR VENDING PRODUCTS Unfortunately, vending p r o f i t i s not automatic. Before con-s i d e r i n g what net p r o f i t might be made by a vending operation, i t i s necessary to estimate what the gross p r o f i t of the business w i l l be. To do t h i s , the estimated sales i n physi c a l units of each product was mu l t i p l i e d by the differe n c e between the cash r e c e i p t s and the cost of goods sold. Tables 21 and 22 show the expected gross p r o f i t s for the years 1975-76 through 1979-80, based r e s p e c t i v e l y on the high and the low estimate of u n i v e r s i t y population. Table 21 Estimated Gross P r o f i t s from Vending Sales f o r the Period September 1975 to August 1980 - High Estimate Year Cigarettes Cold Drinks Hot Drinks Candy To t a l (1) (2) (3) (4) (5) (6) 1975-76 $12,269 $25,952 $80,576 $41,078 $159,875 1976-77 10,389 29,772 96,413 49,046 185,620 1977-78 8,217 33,905 113,911 57,740 213,773 1978-79 5,713 38,184 132,318 66,874 243,089 1979-80 2,871 42,105 149,810 75,530 270,316 Sources: Column 2 Column 3 Column 4 Column 5 Column 6 Col. (2) Table 19 minus Col. (2) Table 17. Col. (3) Table 19 minus Col. (3) Table 17. Col. (4) Table 19 minus Col. (4) Table 17. Col. (5) Table 19 minus Col. (5) Table 17. Col. (2) plus Col. (3) plus Col. (4) plus Col. (5) 54 Table 22 Estimated Gross P r o f i t s from Vending Sales f o r the Period September 1975 to August 1980 - Low Estimate Year Cigarettes Cold Drinks Hot Drinks Candy Tot a l (1) (2) (3) (4) (5) (6) 1975-76 $11,506 $24,337 $ 75,563 $38,522 $149,928 1976-77 9,445 27,066 87,652 44,590 168,753 1977-78 7,279 30,031 100,895 51,143 189,348 1978-79 4,963 33,174 114,956 58,099 211,192 1979-80 2,465 36,154 128,634 64,854 232,107 Sources: Column 2: Col. (2) Table 20 minus Col. (2) Table 18. Column 3: Col. (3) Table 20 minus Col. (3) Table 18. Column 4: Col. (4) Table 20 minus Col. (4) Table 18. Column 5: Col. (5) Table 20 minus Col. (5) Table 18. Column 6: Col. (2) plus Col. (3) plus Col. (4) plus Col. (5). FIGURE V] MAJOR VENDING PRODUCT LINE -COST OF GOODS SOLD, SELLING PRICE AND GROSS PROFIT Gross P r o f i t Cost of Goods Sold V///\ S e l l i n g P r i c e 55 VII. OPERATING EXPENSES 56 The operating expenses for a university-owned vending operation w i l l d i f f e r from that of an "outside" vendor. Supplying the same services, the university-owned operation should incur fewer expenses and for l e s s e r amounts. The university-owned operation w i l l have no d i r e c t maintenance costs since these costs are borne by the u n i v e r s i t y ' s general main-tenance fund. Apart from a business l i c e n s e , the operation i s exempt from taxes which are l e v i e d against outside vendors. These can be i n the form of income taxes, p r o v i n c i a l , federal or sales tax. Machine and truck maintenance costs should be minimal i f the operation employs new equipment which c a r r i e s with i t c e r t a i n guarantees at no cost to the purchaser. Insurance should be le s s c o s t l y since each department i s covered by the University's blanket p o l i c y . Truck insurance i s included i n the f l e e t - t r u c k coverage at a greatly reduced premium. The commission expense i s lower than for other vending operators since the operation w i l l pay commissions only to a portion of i t s l o c a t i o n s . These locations w i l l account for le s s than h a l f of the t o t a l number of locations i n the system. There are no d i r e c t b u i l d i n g and garage r e n t a l or expenses for warehousing, o f f i c e or work areas. WAGES The wages and s a l a r i e s for the vending s t a f f were calculated according to the salary schedule as set out i n the Union 116 of C.U.P.E. c o l l e c t i v e agreement with the Un i v e r s i t y of B r i t i s h Columbia. This union represents the U.B.C. Food Service Employees. The vending s t a f f , 57 as part of the Food Services Department, would ne c e s s a r i l y be governed by the same agreement. The establishment of the vending s t a f f was derived by using as a guide, the current s t a f f i n g of vending employees assigned to the Univer-s i t y of B.C. by Vancouver Enterprises. Much of the administrative work, other than that of management, would be c a r r i e d out by the already established u n i v e r s i t y departments. These departments include p a y r o l l , finance, purchasing, p h y s i c a l plant and personnel. The a d d i t i o n a l c l e r i c a l work created by the operation would be absorbed by the e x i s t i n g s t a f f of the Food Service Department. The proposed establishment f o r the vending operation would consist of: PLAN A 1 1 P a y r o l l Costs Manager $16,000 Supervisor Mechanic @ $1,288 per month 15,456 Routemen at $989 per month (3h for 8 months and 2 for 4 months) 35,604 Tot a l P a y r o l l $67,060 Benefits at 7% of p a y r o l l 4,694 TOTAL PAYROLL EXPENSE $71,754 12 PLAN B Manager $16,000 Supervisor Mechanic @ $1,288 per month 15,456 Routemen @ $989 per month (3 for 8 months and 1% for 4 months) 29,670 Tot a l P a y r o l l $61,126 Ben e f i t s l 3 4,279 TOTAL PAYROLL EXPENSE $65,405 This i s the estimated number of s t a f f needed f or the operation of the vending required by the u n i v e r s i t y population based on the High Estimate. 12 Staff f o r the vending required for the u n i v e r s i t y population based on the Low Estimate. 13 To date, the benefits costs for the Food Service Department i s 7%. The same percentage i s used here. 58 VENDING MACHINE MAINTENANCE Since the vending machines i n t h i s proposed system would be new, the maintenance costs during the f i r s t year of operation would be covered by the machine guarantees. During the following years, the maintenance cost should be minimal r i s i n g with the age of the machines. Therefore, since the f i r s t f i v e years of the operation w i l l include new and then nearly new machines, a .5% of sales allotment for t h i s expense should be adequate. TRUCK EXPENSE Like the vending machines, the vending trucks w i l l also be new, thus i n c u r r i n g a lower maintenance cost than those of other companies which may employ not-so-new v e h i c l e s . Also, because the vending locations are c e n t r a l i z e d i n a r e l a t i v e l y small geographical area, p e t r o l and o i l expenses w i l l be comparatively lower. One per cent of sales has been a l l o t t e d for truck maintenance and gas and o i l expense. INSURANCE The employees, property and contents w i l l be covered by the Un i v e r s i t y of B.C.'s blanket p o l i c y at no expense to the i n d i v i d u a l department. This includes f i r e and property insurance, insurance against thefts and break-ins, l i a b i l i t y insurance to cover i n case of damages or accidents caused by the machines, workmen's compensation insurance and unemployment be n e f i t s . The vehicles w i l l be covered by the University's f l e e t p o l i c y . Each v e h i c l e i s insured and paid for by the i n d i v i d u a l department, but under t h i s f l e e t p o l i c y , the premiums are minimal. An allotment of .5% of sales i s made for t h i s expense. MISCELLANEOUS EXPENSE 59 Most of the miscellaneous expense that i s incurred by other vending companies w i l l be exempt to the university-owned operation. These include expense f o r rent, telephone, u t i l i t i e s , taxes and lic e n s e s which are paid for by the general u n i v e r s i t y account. An allotment of 1% of sales i s made for such expenses as uniforms, repair parts, f r e i g h t , o f f i c e supplies and other minor expenses. COMMISSIONS The commission expense account includes commissions paid to locations other than those that are under the j u r i s d i c t i o n of the Food Services Department. These locati o n s are i n student lounges, the Faculty Club, the Graduate Centre, the Religious Colleges, Student Residences and the Student Union Building. The commission rates are the same as those being presently paid to the locations by the vending company, Vancouver Enterprises Co. Ltd. The commission rates are: Candy 7% of sales Cold Drinks 25% of sales Hot Drinks 15% of sales Cigarettes 5.04 + 3c per package In order to estimate the anticipated commission expense for the next f i v e years, i t was necessary to adopt as a basis the proportion of sales of the major vending products a t t r i b u t e d to those accounts adminis-tered by the Alma Mater Society and those by the Food Services Department. As previously stated (see p.45), the Alma Mater Society accounts for 17% of the c i g a r e t t e sales, 39% of candy, 38% of cold drinks and 37% of the hot drink sales. The appropriate commissions were then applied to the proportion of sales by the Alma Mater Society accounts as shown i n Tables 23 and 24. Table 23 Estimated Commissions Paid to the Alma Mater Society for Vending Sales Based on the High Estimate Year Cigarettes Cold Drinks Hot Drinks Candy Tot a l Commission AMS Sales # of Pkgs Commission AMS Sales $ Commission AMS Sales $ Commission AMS Sales $ Commission $ (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 1975-76 10,429 $839 $21,132 $5,283 $43,158 $ 6,474 $53,401 $3,738 $16,333 1976-77 8,831 710 24,243 6,061 51,640 7,746 60,490 4,234 18,751 1977-78 6,985 562 27,608 6,902 61,012 9,152 75,062 5,254 21,870 1978-79 4,856 390 \ 31,093 7,773 70,872 10,631 86,936 6,086 24,880 1979-80 2,440 196 ' 34,286 8,571 80,240 12,036 98,189 6,873 27,676 i Sources: Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9 Column 10 17% of t o t a l estimated sales f o r each year. Commission rate of 5.04 + 3<: per package times Col. (2), 38% of t o t a l estimated sales for each year. Commission rate of 25% of sales times Col. (4). 37% of t o t a l estimated sales f o r each year. Commission rate of 15% of sales times Col. (6). 39% of t o t a l estimated sales for each year. Commission rate of 7% of sales times Col. (8). Col. (3) plus Col. (5) plus Col. (7) plus Col. (9). ON o Table 24 Estimated Commissions Paid to the Alma Mater Society for Vending Sales Based on the Low Estimate To t a l Year Cigarettes Cold Drinks Hot Drinks Candy Commission AMS Sales Commission AMS Sales Commission AMS Sales Commission AMS Sales Commission # of Pkgs $ $ $ $ (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 1975-76 $9,781 $786 $19,817 $4,954 $40,473 $ 6,071 $50,079 $3,506 $15,317 1976-77 8,029 646 22,040 5,510 46,948 7,042 57,967 4,058 17,255 1977-78 6,187 497 24,454 6,114 54,041 8,106 66,485 4,654 19,371 1978-79 4,219 339 27,013 6,753 61,572 9,236 75,530 5,287 21,615 1979-80 2,095 168 29,441 7,360 68,898 10,335 84,310 5,902 23,765 Sources: See Table 23. ON P-1 62 TOTAL OPERATING EXPENSES Having calculated the i n d i v i d u a l operating expenses (wages, machine maintenance, truck expense, insurance, miscellaneous expense, commissions), i t i s now possible to determine the t o t a l operating expenses as shown i n the/following two tables, Table 25 and 26. Table 25 Schedule of Proposed Operating Expenses - High Estimate 1975-76 1976-77 1977-78 1978-79 1979-80 Wages (19% of sales) $67,563 $ 76,611 $ 87,168 $ 98,093 $108,092 Machine Maintenance .5% 1,761 2,016 2,294 2,581 2,845 Truck Expense 1.0% 3,521 4,032 4,588 5,163 5,689 Insurance .5% 1,761 2,016 2,294 2,581 2,845 Misc. Expense 1.0% 3,521 4,032 4,588 5,163 5,689 Commissions 16,333 18,751 21,870 24,880 27,676 Tot a l Operating Expenses $94,460 $107,458 $122,802 $138,461 $152,836 Sources: A l l expenses except f or commissions are expressed as a percentage of sales. Commissions: Table 23. 63 Table 26 14 Schedule of Proposed Operating Expenses - Low Estimate Operating Expenses 1975-76 1976-77 1977-78 1978-79 1979-80 Wages (19% of Sales) $62,544 $69,431 $ 77,208 $ 85,221 $ 92,814 Machine Maintenance .5% 1,651 1,833 2,032 2,243 2,443 Truck Expense 1.0% 3,302 3,666 4,064 4,485 4,885 Insurance .5% 1,651 1,833 2,032 2,243 2,443 Misc. Expense 1.0% 3,302 3,666 4,064 4,485 4,885 Commissions 15,317 17,255 19,371 21,615 23,765 Tot a l Operating Expenses $87,767 $97,684 $108,771 $120,292 $131,235 Sources: Commissions: Table 24. 14 The expenses which are expressed as a percentage of sales (except for commissions) include both f i x e d and v a r i a b l e components which may respond i n varying degrees to the changes i n the volume of business. It i s obvious that there may not be a l i n e a r r e l a t i o n s h i p between costs and volume. However, a f t e r analyzing the expenses of both the U.B.C. Food Services Department and those i n the vending industry (see Table 27), i t was f e l t j u s t i f i a b l e to express the expenses i n approximate amounts using percentage of the t o t a l sales as the basis of computation. 64 COMPARISON OF OPERATING EXPENSES Questionnaires were sent to a number of u n i v e r s i t i e s i n Canada and i n the United States who were known to be operating t h e i r own vending services. Although the response was not overwhelming, the four com-pleted questionnaires that were returned did provide some information that could be used as a general basis of comparison. In addition to the four u n i v e r s i t i e s , the following table includes the operating expenses as published by the NAMA (National Automatic Merchandising Association) i n Chicago, I l l i n o i s , from data submitted by i t s members. Table 27 A Comparison of Operating Expenses (Expressed as a Percentage of Sales) Proposed Univ. Univ. Brigham UBC of Sask. W.S.U. of Utah Young NAMA Vending Univ. (1) (2) (3) (4) (5) (6) (7) Wages 19 % 19 % 28.4 % 32 % 15.7 % 22 % Machine Main. .5 .9 .86 2.1 3.4 1.08 Truck Expense 1.0 1.1 .97 2.0 .6 1.21 Insurance .5 .5 .05 .33 Misc. Expense 1.0 4.96 Commissions 4.7 8.52 Sources: Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Tables 19 and 25. Unive r s i t y of Saskatchewan, Saskatoon, Sask. Washington State U n i v e r s i t y , Pullman, Wash. Unive r s i t y of Utah, Salt Lake C i t y , Utah. Brigham Young U n i v e r s i t y , Provo, Utah. 1973 Operating Ratio Report for the NAMA compiled from reports submitted to Pr i c e Waterhouse & Co. CHAPTER V CAPITAL BUDGETING Ca p i t a l budgeting involves a current investment In which the benefits are expected to be received beyond one year i n the future. Because vending machines have an expected l i f e of more than one year, the proposed investment i n a vending operation involves c a p i t a l budgeting. The r u l e that the fir m should accept a l l projects which, a f t e r taking into account of the time value of money and subject to budgetary constraints, y i e l d benefits which exceed costs, holds true here. C a p i t a l r a t i o n i n g i s not a r e a l constraint i n t h i s study because the fi r m (University of B r i t i s h Columbia) does not have a budget c e i l i n g on the amount of funds that can be invested during a s p e c i f i c period of time. The Univ e r s i t y of B.C. does not have a p o l i c y of financing a l l c a p i t a l expenditures i n t e r n a l l y , but rather employs some funds from outside sources such as the Bank of Montreal. Each investment proposal i s examined and judged i n d i v i d u a l l y and accepted i f i t w i l l make an economic contribution. Since there i s a lack of budgetary constraint, i n t h i s case, other investment opportunities w i l l not be considered. The basic process of investment analysis consists of the evaluation of the investment outlay i n terms of the economic gains provided by i t . These can then be matched with the cost of the funds Van Home, J.C. F i n a n c i a l Management and P o l i c y (2nd ed.; Englewood C l i f f s , New Jersey: P r e n t i c e - H a l l , 1971), p. 45. 65 66 used f o r t h i s purpose. The investment outlay i s represented by the net investment required for the proposition, while the economic benefits are represented by the operating cash flows generated by the investment. I. NET INVESTMENT Net Investment r e f e r s to the amount of funds committed to the investment which i s equal to the cost of the c a p i t a l assets (including i n s t a l l a t i o n , s t a r t up costs and s i m i l a r outlays) plus any increase i n working c a p i t a l required. The i n i t i a l c a p i t a l outlay w i l l depend mainly upon the number and types of vending machines that are required to duplicate the e x i s t i n g s ervice. The next biggest expenditure w i l l be for vehicles for trans-port a t i o n and cartage because the machines are situated i n locations which are scattered throughout the u n i v e r s i t y area. No pr o v i s i o n has been made for separate machines to s e l l f r u i t j u i c e because t h i s product can be dispensed i n the a l l purpose merchandiser. S i m i l a r l y , no pr o v i s i o n i s made for pastry and snack machines because these products can be vended i n the new c o i l - t y p e snack vendor which provides f o r t h i r t y d i f f e r e n t selections (including snacks, pastry, cookies, candy, gum and chi p s ) . Therefore, there w i l l be a fewer number of machines, but those machines included i n the system w i l l provide for a greater s e l e c t i o n i n each machine with a greater vendor capacity than some of the older-type machines presently being used. 67 Table 28 Vending Machines Required for Proposed Vending Operation Type of Machine Number Required Price of Each Machine Tot a l Amount for Each Type of Machine (1) (2) (3) (4) Cigarette 31 $ 695 $ 21,545 Cold Drink 32 2,580 82,560 Hot Drink 27 2,235 60,345 Candy & Snacks 36 1,795 64,320 Ice Cream 3 1,680 5,040 Hot Food 2 1,105 2,210 Sundries 3 1,800 5,400 A l l Purpose 10 2,560 25,600 Tot a l 144 $267,020 Sources: Column 2: Table 1. Column 3: Rowe International of Canada Ltd., 28 West 5th Ave., Vancouver, B.C. Column 4: Col. (2) times Col. (3). 68 I I . FINANCING THE VENDING OPERATION One of the biggest problems when considering a university-owned vending operation, i s the financing of such an enterprise. Assuming that the number of machines and the type of machines would remain the same mix as i t i s under the present contract, i t would be necessary for the u n i v e r s i t y to be financed for approximately $281,000. Purchase of machines (see Table 28) $267,020 Trucks (2) @ $5,400 each 10,800 I n s t a l l a t i o n of workshop 2,000 O f f i c e and other Equipment 1,000 Tot a l $280,820 The u n i v e r s i t y has few avenues open for c a p i t a l financing. The Food Service Department, under whose con t r o l the operation would come, could make an a p p l i c a t i o n to the u n i v e r s i t y for a c a p i t a l grant which i s a fund set up by the B.C. government. However, i t i s a known fac t that the A n c i l l a r y Services (which includes the Food Service Department) i s one of low p r i o r i t y , making i t d i f f i c u l t to obtain funds from t h i s source. The fund f u l f i l l s academic needs f i r s t , making t h i s means a p o s s i b i l i t y , but not the most r e a l i s t i c . Another a l t e r n a t i v e i s that of i n t e r n a l financing. The u n i v e r s i t y would make a loan from an i n t e r n a l fund ( i . e . endowment fund) to the Food Service Department i n return for debentures (unsecured bonds). This means of financing would be considered only i f a bank loan i s not obtainable at an acceptable rate of i n t e r e s t . An example of i n t e r n a l financing i s the financing of the Student Union Building by the Alma Mater Society by which the u n i v e r s i t y accepted debentures which are r e t i r e d at predetermined times. 69 Obtaining a bank loan i s probably the most p r a c t i c a l of a l l the a l t e r n a t i v e s . When the u n i v e r s i t y obtains a loan, a unique s i t u a t i o n a r i s e s i n that the u n i v e r s i t y , i n return for the loan, i s not able to mortgage any of i t s b u i l d i n g s , for there can be no leans placed on u n i v e r s i t y b u i l d i n g s . Since the u n i v e r s i t y cannot o f f e r any s e c u r i t y , i t i s only on the word of the Board of Governors that the loan w i l l be repaid. The bank loan would be obtainable from the Bank of Montreal which extends a l i n e of c r e d i t to the U n i v e r s i t y of B.C. at a rate of 0.5% above the prime rate. I I I . INVESTMENT ANALYSIS Once the s i z e of the investment has been determined, the next step i s to c a l c u l a t e the economic benefits (cash inflows) of the project. Any forecast including the estimation of future cash flows i s subject to uncertainty, but for a l l p r a c t i c a l purposes, estimates have to be used i n analyzing the economic impact of the investment d e c i s i o n . In order to avoid gross error, i t i s sometimes useful to e s t a b l i s h a range of estimates for c e r t a i n operating costs or revenues, such as the most l i k e l y f i g u r e , the highest and the lowest expectations, i n order to see whether the investment proposal has merit even i f unfavourable conditions develop. In t h i s case, I am using the low and the high estimate presented by the Department of Academic Planning for future enrollment of students as a basis for the range. Cash flows are seldom i d e n t i c a l with p r o f i t s or income. Changes i n income can occur without any corresponding changes i n cash flows. Since the nature of the vending business necessitates the r e c e i p t of cash 70 with each sales transaction, there are no sales on account making sales therefore synonymous with income. Tables 29 and 30 show the net cash flows (operating p r o f i t ) f o r f i v e periods. The popular conception of an investment i s usually one i n which there i s a one-period outlay of funds, followed by a s e r i e s of periods i n which incomes are earned. The two approaches commonly taken to measure investment worth are rules of thumb or rough guides on the one hand, and methods of determining economic benefits on the other. The f i r s t approach i s often associated with the widely used "payback period" which represents the number of years required to return the o r i g i n a l investment. This method, though easy to c a l c u l a t e , has many short-comings and can lead to wrong decisions. Simple return on investment i s also a rough economic yardstick. The second approach u t i l i z e s the concepts of the time value of money (a d o l l a r i n hand today i s more valuable than a d o l l a r received a year from now) to derive e i t h e r the "present value" or the " y i e l d " of an investment as a c r i t e r i o n of judging i t s a c c e p t a b i l i t y . Future returns are defined as the net proceeds before depreciation but a f t e r taxes that r e s u l t from a project. Therefore, we can think of these returns as being synonymous with cash flows from an investment. Table 29 Cash Flow Analysis Based on the High Estimate 1975-76 1976-77 1977-78 1978-79 1979-80 (1) (2) (3) (4) (5) (6) Sales at R e t a i l $353,973 $405,430 $461,396 $519,317 $572,349 Cost of Sales 194,098 219,810 247,623 276,228 302,033 GROSS PROFIT $159,875 $185,620 $213,673 $243,089 $270,316 T o t a l Operating Expenses 94,460 107,458 122,802 138,461 152,836 Interest Expense 28,082 24,349 18,967 10,777 1,392 OPERATING PROFIT $ 37,333 $ 53,813 $ 71,904 $ 93,851 $116,088 Sources: Tables 19, 20, 25, 26. Interest expense i s cal c u l a t e d at a rate of 10% which i s the University's borrowing rate at the time t h i s study was made (.5% above the prime r a t e ) . See Appendix E for c a l c u l a t i o n s . Table 30 Cash Flow Analysis Based on Low Estimate 1975-76 1976-77 1977-78 1978-79 1979-80 (1) (2) (3) (4) (5) (6) Sales at R e t a i l $331,951 $368,590 $408,678 $451,174 $491,448 Cost of Sales 182,023 199,023 219,330 239,983 259,341 GROSS PROFIT $149,928 $168,753 $189,348 $211,191 $232,107 To t a l Operating Expenses 87,767 97,684 108,771 120,292 131,235 Interest Expense 28,082 24,349 18,967 10,777 1,392 OPERATING PROFIT $ 34,079 $ 46,720 $ 61,610 $ 80,122 $ 99,480 Sources: Tables 20 and 26. 73 IV. NET-PRESENT VALUE APPROACH If the firm i s not subject to c a p i t a l r e s t r a i n t s ( c a p i t a l rationing) i t i s said that the net present value method i s the better method to use because i t provides a more objective basis for evaluating and s e l e c t i n g Investment pr o j e c t s . In the case of the vending operation proposal, c a p i t a l r a t i o n i n g i s not a constraint. In the present value method, a l l cash flows are discounted to present values using the required rate of return. NPV = 2.4 where "k" i s the required rate of return. t = 0 (1 + k ) C The rate of return "k" i s equal to the u n i v e r s i t y ' s borrowing rate (.5% above prime r a t e ) . I f the sum of these discounted cash flows equals zero or i s greater than zero, the proposal i s accepted. The present-value computation requires the following steps: 1. Choose an appropriate rate of i n t e r e s t . 2. Compute the present value of the cash proceeds expected from the investment. 3. Compute the present value of the cash outlays required by the inves tment. 4. The present value of the proceeds minus the present value of the outlays i s the net present value of the investment. 5. The recommended accept or r e j e c t c r i t e r i o n i s to accept a l l independent investments whose present value i s greater than or equal to zero and to r e j e c t a l l investments whose present value i s le s s than zero. I f the two projects are mutually exclusive (mutually exclusive proposals are a l t e r n a t i v e methods of doing the same job ) , the one with the higher net present value should be chosen over the other. The method of c a l c u l a t i o n to determine the present value of an investment with i t s cash inflows i s shown using two d i f f e r e n t discount rates - 10% and 10%%. These p a r t i c u l a r discount rates have been employed because they r e l a t e to the u n i v e r s i t y ' s present borrowing rate f or t h i s investment. The meaning of the r e s u l t i n g f i g u r e , net present value, i s that t h i s sum represents the value of the investment opportunity over and above the s t i p u l a t e d rate of return. The bigger the net present value, the higher the d e s i r a b i l i t y . In t h i s case, the net present value i s negative for both the high and the low estimates at the required rates of return of 10% and 10^% (See Tables 31 and 32). 75 NET PRESENT VALUE OF THE INVESTMENT PROPOSAL USING THE HIGH ESTIMATE 1) n A t NPV = k = 0.1 or 10% t=0 (1 + k ) C NPV = -280,820 + 37,333 + 53,813 + 71,904 + 93,851 + 115,088 1+0.1 (1+0.1) 2 (1+0.1) 3 (1+0.1) 4 (1+0.1) 5 = -280,820 + 33,939 + 44,474 + 54,063 + 64,106 + 72,104 = -12,134 2) k = 0.1025 or 10%% NPV = -280,820 + 37,333 + 53,813 + 71,904 + 93,851 + 116,088 1+0.1025 (1.1025) 2 (1.1025) 3 (1.1025) 4 (1.1025) 5 = -280,820 + 33,862 + 44,272 + 53,660 + 63,520 + 71,268 = -14,238 NET PRESENT VALUE OF THE INVESTMENT PROPOSAL USING THE LOW ESTIMATE 1) k = 0.1 or 10% NPV = -280,820 + 34,079 + 46,720 + 61,610 + 80,122 + 99,480 1.1 (1+0.I) 2 (1+0.I) 3 (1+0.I) 4 (1+0.I) 5 = -280,820 + 30,981 + 38,612 + 46,323 + 54,728 + 61,789 = -48,387 2) k = 0.1025 or 10%% NPV = -280,820 + 34,079 + 46,720 + 61,610 + 80,122 + 99,480 1+0.1025 (1.1025) 2 (1.1025) 3 (1.1025) 4 (1.1025) 5 = -280,820 + 30,911 + 38,437 + 45,978 + 54,228 + 61,072 = -50,194 Table 31 Net Present Value of Investment - High Estimate Time Period Cash Outflows-Investment Operating Cash Inflows Present Value Discount Rate 10% Net Present Value at 10% Present Value Discount Rate 10%% Net Present Value at 10 (1) (2) (3) (4) (5) (6) (7) Present $280,820 1.00 ($280,820) 1.0 ($280,820) Year 1 ... $ 37,333 1.1 33,939 1.1025 33,862 Year 2 ... 53,813 1.21 44,474 1.2155 44,272 Year 3 .. . 71,904 1.33 54,063 1.34 53,660 Year 4 . . . 93,851 1.464 64,106 1.4775 63,520 Year 5 ... 116,088 1.61 72,104 1.6289 71,268 -$ 12,134 -$ 14,238 Sources: Column 2 Column 3 Column 5 Column 7 Page 68. Table 29. Col. (3) divided by Col. (4) Col. (3) divided by Col. (6) Table 32 Net Present Value of Investment - Low Estimate Time Period Cash Outflows-Investment Operating Cash Inflows Present Value Discount Rate 10% Net Present Value at 10% Present Value Discount Rate 10%% Net Present Value at 10 (1) (2) (3) (4) (5) (6) (7) Present $280,820 1.0 ($280,820) 1.0 ($280,820) Year 1 ... $ 34,079 1.1 30,981 1.1025 30,911 Year 2 ... 46,720 1.21 38,612 1.2155 38,437 Year 3 ... 61,610 1.33 46,323 1.34 45,978 Year 4 . .. 80,122 1.464 54,728 1.4775 54,228 Year 5 ... 99,480 1.61 61,789 1.6289 61,072 -$ 48,387 -$ 50,194 Sources: Column 2 Column 3 Column 5 Column 7 Page 68. Table 30. Col. (3) divided by Col. (4), Col. (3) divided by Col. (6), CHAPTER VI I. INVESTMENT ALTERNATIVE As we have seen i n Chapter V, the investment proposal shows a negative net present value for both the high and low estimates at discount rates of 10% and 10%%"^ (see Tables 31 and 32). According to the net present value accept or r e j e c t c r i t e r i o n , the investment proposal should be rejected. However, before a f i n a l d e c i s i o n i s made, investment a l t e r n a t i v e s should be considered. In t h i s case, the most obvious a l t e r n a t i v e i s to continue with the present arrangement - that of con-t r a c t i n g the vending operation to an "outside" firm by which the f i r m pays commissions on vending sales to the U n i v e r s i t y . Because these two a l t e r n a t i v e s , one being a university-owned operation and the other being an outside-owned vending operation, are mutually exclusive, only one can be accepted. By being "mutually exclusive", the p o t e n t i a l benefits to be derived from the f i r s t investment w i l l completely disappear i f the second investment i s accepted. The vending commissions to be received for the period September 1975 to August 1980 by the Food Services Department are estimated to be $190,551 for the high estimate and $169,137 for the low estimate (see Tables 33 and 34). These t o t a l s discounted by the rates 10% and 10%% show a net present value of over $140,000 for the high estimate and over $125,000 for the low estimate (see Tables 35 and 36). 17 These discount rates r e l a t e to the U n i v e r s i t y ' s borrowing rate. See page 69. 78 Table 33 Projected Commissions for Food Service Vending Machines Based on the High Estimate Year Cigarettes Cold Drink Hot Drink Candy Tot a l Commissions Sales Comm. Sales Comm. Sales Comm. Sales Comm. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 1975-76 50,916 4,094 229,856 8,620 497,678 11,198 417,626 5,847 29,759 1976-77 43,115 3,466 263,691 9,888 595,492 13,399 498,638 6,981 33,734 1977-78 34,102 2,742 300,299 11,261 703,566 15,830 587,023 8,218 38,051 1978-79 23,709 1,906 338,200 12,683 817,259 18,388 679,887 9,518 42,495 1979-80 11,914 958 372,934 13,985 925,294 20,819 767,890 10,750 46,512 Total Commissions $190,551 Sources: Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9 Column 10 Col. (4) Table 6. No. of packages of cigarettes times 5.04c & 3c (commission paid for each package) Col. (4) Table 8. No. of cups times 150 ( s e l l i n g price) x .25 (commission paid on t o t a l s a l e s ) . Col. (4) Table 10. No. of cups times 15<; ( s e l l i n g price) x .15 (commission paid on t o t a l ) . Col. (4) Table 12. No. of bars times 20c ( s e l l i n g price) x .07 (commission paid on t o t a l ) . Col. (3) + Col. (5) + Col. (7) + Col. (9) . Table 34 Projected Commissions for Food Service Vending Machines Based on the Low Estimate Year Cigarettes Cold Drink Hot Drink Candy Tot a l Commissions Sales Comm. Sales Comm. Sales Comm. Sales Comm. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 1975-76 47,748 3,839 215,556 8,083 466,716 10,501 391,644 5,483 27,906 1976-77 39,198 3,152 239,730 8,990 541,380 12,181 453,328 6,347 30,670 1977-78 30,206 2,429 265,987 9,975 623,178 14,022 519,950 7,279 33,705 1978-79 20,598 1,656 293,823 11,018 710,021 15,975 590,675 8,269 36,918 1979-80 10;230 823 320,220 12,008 794,504 17,876 659,349 9,231 39,938 Tot a l Comm iss i o n s $169,137 Sources: Column Column Column Column Column Column Column 8 Column 9 Column 10 Col. (4) Table 7. No. of packages of cigarettes times 5.040 + 30 (commission paid for each package) Col. (4) Table 9. No. of cups times 150 ( s e l l i n g price) x .25 (commission paid on t o t a l s a l e s ) . Col. (4) Table 11. No. of cups times 150 ( s e l l i n g price) x .15 (commission paid on t o t a l ) . C o l . (4) Table 13. No. of bars times 200 ( s e l l i n g price) x .07 (commission paid on t o t a l ) . Col. (3) + Col. (5) + Col. (7) + Col. (9). Table 35 Net Present Value of Investment A l t e r n a t i v e (Commissions Only) High Estimate Time Period Cash Outflows-Investment Operating Cash Inflows Present Value Discount Rate 10% Net Present Value at 10% Present Value Discount Rate 10%% Net Present Value at 10%% (1) (2) (3) (4) (5) (6) (7) Present 1.00 1.0 Year 1 29,759 1.1 27,054 1.1025 26,992 Year 2 33,734 1.21 27,879 1.2155 27,753 Year 3 38,051 1.33 28,610 1.34 28,396 Year 4 42,495 1.464 29,027 1.4775 28,761 Year 5 46,512 1.61 28,889 1.6289 28,554 $141,459 $140,456 Sources: Column 3: Table 33. Column 5: Col. (3) divided by Col. (4). Column 7: Col. (3) divided by Col. (6). Table 36 Net Present Value of Investment A l t e r n a t i v e (Commissions Only) Low Estimate Time Period Cash Outflows-Investment Operating Cash Inflows Present Value Discount Rate 10% Net Present Value at 10% Present Value Discount Rate 10%% Net Present Value at 10%% (1) (2) (3) (4) (5) (6) (7) Present 1.00 1.0 Year 1 27,906 1.1 • 25,369 1.1025 25,312 Year 2 30,670 1.21 25,347 1.2155 25,232 Year 3 33,705 1.33 25,342 1.34 25,153 Year 4 36,918 1.464 25,217 1.4775 24,987 Year 5 39,938 1.61 24,806 $126,081 1.6289 24,518 $125,202 Sources: Column 3: Table 34. Column 5: Col. (3) divided by Col. (4). Column 7: Col. (3) divided by Col. (6). 83 Using the same accept or r e j e c t c r i t e r i o n , since the net present value i s p o s i t i v e f o r both the high and low estimates, t h i s investment a l t e r n a t i v e i s acceptable. I I . COMPARISON BETWEEN INVESTMENT PROPOSAL AND INVESTMENT ALTERNATIVE In comparing the two investments, i t i s evident that the investment a l t e r n a t i v e f o r the Food Services Department to receive commissions only from an outside vending firm, w i l l y i e l d the highest net present value over the f i v e year period (see Tables 37 and 38). Table 37 Comparison Between the Investment Proposal and the Investment A l t e r n a t i v e Based on the High Estimate University-Owned Commissions Received Vending Operation By Food Service Dept From Outside Firm 10% 10%% 10% 10%% I n i t i a l Investment Required $280,820 $280,820 - -P.V. of Expected Cash Inflows 336,825 334,387 $141,459 $140,456 Net Present Value of Project -$• 12,134 -$14,238 $141,459 $140,456 Table 38 Comparison Between the Investment Proposal and the Investment A l t e r n a t i v e Based on the Low Estimate University-Owned Vending Operation Commissions Received By Food Service Dept From Outside Firm 10% 10%% 10% 10%% I n i t i a l Investment Required $280,820 $280,820 - -P.V. of Expected Cash Inflows 300,571 298,431 $126,081 $125,202 Net Present Value of Project -$ 48,387 -$ 50,194 $126,081 $125,202 84 I I I . SALVAGE VALUE According to the net present value technique, the a l t e r n a t i v e to maintain the present system (commissions received from an outside firm) should be preferred. However, there are other factors that influence the Investment decision that cannot be ignored. F i r s t l y , i n t h i s study, no allowance has been made for salvage value to be recovered for the machines and equipment a f t e r the i n i t i a l f i v e year period. Obviously, there w i l l be some salvage value i f the operation i s discontinued a f t e r t h i s period. The approximate salvage value w i l l be: Resale of vending machines $ 73,400 Trucks (2) $700 1,400 O f f i c e and other equipment 250 To t a l $ 75,050 If the vending operation does continue, the machines w i l l produce a stream of cash proceeds far beyond the f i v e year period. Experience shows that the l i f e expectancy of vending machines i s r e a l l y i n d e f i n i t e as f a r as time i s concerned, determined mainly by i t s obsolescence. IV. FUTURE INCOME Assuming that the pay back period f o r the investment i s j u s t l e s s than f i v e years, as outlined i n Chapter V, the future revenues from the vending operation w i l l be ongoing. Trying to predict what these revenues w i l l be i s almost impossible, given the amount of information and data a v a i l a b l e . However, i n order to i l l u s t r a t e the importance of future income beyond the pay back period on the investment decision, i t i s necessary to show (see Tables 39 through 43) how s u b s t a n t i a l these revenues could be, even without further growth i n sales (see Col. (2) i n Tables 39, 40, 41, 42). These predictions were made under the assumption that the per capita consumption of vended products remain at a constant rate as established i n the f i f t h year of the investment. The investment should create income even beyond t h i s 10 year period. 86 Table 39 Net Present Value of Investment - High Estimate Time Operating Present Value Net Present Present Value Net Present Period Cash Inflows Discount Rate Value at 10% Discount Rate Value at 10%% .10% 10%% (1) (2) (3) (4) (5) (6) Year 6 $117,480 1.77 66,374 1.8 65,267 7 117,480 1.95 60,246 1.84 63,848 8 117,480 2.14 54,897 1.89 62,159 9 117,480 2.36 49,780 1.93 60,870 10 117,480 2.59 45,359 1.98 59,333 276,656 311,477 Sources: Column 2: Table 31. Column 4: Col. (2) divided by Col. (3). Column 6: Col. (2) divided by Col. (5). Table 40 -Net Present Value of Investment - Low Estimate Time Operating Present Value Net Present Present Value Net Present Period Cash Inflows Discount Rate Value at 10% Discount Rate Value at 10%% 10% 10%% (1) (2) (3) (4) (5) (6) Year 6 $100,872 1.77 56,990 1.8 56,040 7 100,872 1.95 51,729 1.84 54,822 8 100,872 2.14 47,136 1.89 53,371 9 100,872 2.36 42,742 1.93 52,265 10 100,872 2.59 38,947 1.98 50,945 237,544 267,443 Sources: Column 2: Table 32. Column 4: Col. (2) divided by Col. (3). Column 6: Col. (2) divided by Col. (5). 87 Table 41 Net Present Value of Investment A l t e r n a t i v e (Commissions Only) High Estimate Time Period Operating Cash Inflows Present Value Discount Rate 10% . Net Present Value at 10% Present Value Discount Rate 10%% Net Present Value at 10%% (1) (2) (3) (4) (5) (6) Year 6 $46,512 1.77 $ 26,278 1.8 $ 25,840 7 46,512 1.95 23,852 1.84 25,278 8 46,512 2.14 21,735 1.89 24,610 9 46,512 2.36 19,708 1.93 24,099 10 46,512 2.59 17,958 $109,531 1.98 23,491 $123,318 Sources: Column 2: Table 33 Column 4: Col. (2) divided by Col. (3). Column 6: Col. (2) divided by Col. (5). Table 42 Net Present Value of Investment A l t e r n a t i v e Low Estimate (Commissions Only) Time Period Operating Cash Inflows Present Value Discount Rate 10% Net Present Value at 10% Present Value Discount Rate 10%% Net Present Value at 10%% (1) (2) (3) (4) (5) (6) Year 6 $39,938 1.77 $ 22,564 1.8 $ 22,188 7 39,938 1.95 20,481 1.84 21,705 8 39,938 2.14 18,663 1.89 21,131 9 39,938 2.36 16,924 1.93 20,693 10 39,938 2.59 15,420 $ 93,952 1.98 20,171 $105,888 Sources: Column 2: Table 34 Column 4: Col (2) divided by Col. (3). Column 6: Col. (2) divided by Col. (5). 88 Table 43 Comparison Between the Investment Proposal and the Investment A l t e r n a t i v e f or Years 6 - 1 0 U n i v e r s i t y Owned Commissions Vending Operation Received 10% 10%% 10% 10%% (1) (2) (3) (4) Net Present Value (High Estimate) 276,656 311,477 109,531 123,318 Net Present Value (Low Estimate) 237,544 276,443 93,952 105,888 Sources: Tables 39, 40, 41 and 42. Upon r e f e r r i n g to Table 43 i t i s evident that the projected revenue f o r the years 6 - 10 of the investment are more than doubled for the university-owned operation. Future income from the machines w i l l also continue to flow a f t e r the 10th year. However, increased operating expenses such as depreciation on equipment ( i . e . vehicles) cannot be ignored. Looking at the investment on a long term basis (at l e a s t 10 years), i t would appear that the U n i v e r s i t y Food Services Department would benefit from owning and operating the vending service. However, there would be a higher degree of r i s k involved. The reader i s reminded that the purpose of t h i s paper i s to investigate the a c c e p t a b i l i t y of the investment proposal and not to determine the ultimate income generated by the investment. C e r t a i n l y , from the r e s u l t s of t h i s study, i t i s obvious that on a short term basis, the U.B.C. Food Services Department should stay with the present system. CHAPTER VII THE FUTURE OF VENDING The future of automatic merchandising seems to hold great possi-b i l i t i e s of expansion, although few people now w i l l dispute the fact that times aren't what they were a year or two ago. The U.S. is perhaps the biggest factor in the world situation and certainly the biggest one to affect Canada. Today the U.S. economy is in serious trouble as are practically a l l Western nations and also that of Japan. The twin problems of galloping inflation and depression which are prevalent in a l l the major manufacturing nations of the "free" world, have an impact on vending. The lower level of industrial activity as experienced in B.C., results in a smaller work force patronizing machines, while reduced consumer buying power affected public vending operations. However, despite these rather depressing economic conditions, the vending future looks good for the University of British Columbia. There are many reasons for this optimistic outlook. With predictions of continued increased student enrollment, and reduced operating hours by the University Food Services Department, there w i l l be a greater demand for goods and services such as those provided by vending machines. This demand for venders w i l l also increase due to problems being experienced by many universities and colleges, including short lunch periods, limited cafeteria areas, big payroll costs, limited budgets and the high cost of food preparation and serving equipment. The use of vending machines can reduce and in some instances, eliminate these problems. 90 91 I. FUTURE RESEARCH As i n a l l research, there are many avenues associated with t h i s study which are l e f t untravelled. The U.B.C. vending operation i n i t s present form provides a service to the u n i v e r s i t y community upon request by i n d i v i d u a l departments without any c o n t r o l l e d or c e n t r a l i z e d plan. Further research could include: 1. A study of future l o c a t i o n s . Undoubtedly, there are now heavy t r a f f i c areas that would benefit from vending services. For example, a bank of machines (including coffee, s o f t drinks, candy, snacks) outside the Bookstore could service the heavy t r a f f i c flow along the Main M a l l , as well as the Sedgewick L i b r a r y c l i e n t e l e . This service would be p a r t i c u l a r l y desirable during the non-operating hours of the Bus Stop Coffee Shop which i s the only manually-operated service i n t h i s area. A s i m i l a r bank of machines might be placed outside the " D e l i " i n the Walter Gage residences (serving 1,800 residents) which operates for l i m i t e d hours between 11:30 a.m. to 1:30 p.m. and 4:45 p.m. to 6:45 p.m., Monday through Friday. These machines could o f f e r the basic food items such as milk, bread, eggs, cheese, butter and s l i c e d meats. Students l i v i n g i n t h i s complex are responsible for t h e i r own meals and have cooking f a c i l i t i e s a v a i l a b l e i n each quadrant. The nearest food store i s located i n the " V i l l a g e " , over a h a l f of a mile away. 2. A study of the product mix of the machines. Outside vending companies do not benefit from the knowledge of consumer demand as do the manually-operated services on campus. This knowledge can be u s e f u l i n quickly adapting any change i n buying habits to the products sold by the 92 machines. Milk sales in the Food Service Units tend to be very high, much higher than those of cold drinks and yet, there are no milk dispensing machines in the present system. 3. A study of new "vendible" products in an effort to increase volume and customer satisfaction through a wider range of products. For example: a) Sugarless "Diet" Soft Drinks - primarily for weight watchers and diabetics. b) French Fried Potato Vender - a substantially new approach to the automatic dispensing of freshly prepared French Fried Potatoes was introduced late last year by Can-Am Marketing Service. This counter-top configuration offers up to a twenty pound capacity of fresh, blanched potatoes already sized in the familiar strips. This machine is available with coin mechanisms to permit virtually any desired vend price. c) Apart from the dollar b i l l changers already in use, Standard Change-Makers has introduced i t s f i r s t $5.00 b i l l changer which accepts $5.00 b i l l s and returns twenty quarters. The availability of change w i l l help to increase vending sales. d) A.Canadian firm, Easy Scoop Industries Limited, has developed a machine that automatically dispenses 3 ounce scoops of hard ice cream. The ice cream is packed in thermally stable boxes and 300 scoops per hour can be dispensed. This particular machine has great potential since only soft ice cream is available on campus because of the d i f f i c u l t i e s of portion control, pricing and dispensing. According to the firm, the vender dispenses perfect scoops for complete portion control. CHAPTER VIII SUMMARY AND CONCLUSIONS The primary impetus for the investigation into a university-owned vending operation came from the Food Services Department of the University of British Columbia. There were several reasons which prompted such a study - a need for additional revenue, a means of extending service while at the same time reducing the hours of the personally-attended operations, and a need for better pre-planning and control of the vending operation. Like most studies, this one was hampered by a lack of data, in particular, recent data. There is l i t t l e written information about automatic merchandising and because the industry consists mainly of small independent operators, accurate stat i s t i c s are unavailable. Historical data was collected for vending sales up to a period of five years. From this, future sales were forecasted using as a basis, the Department of Academic Planning's estimates for future student enrollment. From information obtained from the U.B.C. Personnel Department, a relationship based on student enrollment was established for staff members and faculty members of the University. The number of staff members was calculated to be about 16% and the number of faculty members about 8^ % of the student enrollment. These three group (students, staff and faculty) were combined to form the "University Population" which is considered as the potential clientele of the University vending operation. 93 94 Since both a high and a low estimate were established for student enrollment, t h i s study also included a high and a low estimate of future sales f o r the major vending products (ci g a r e t t e s , cold drinks, hot drinks, candy) which account for over 99% of the vending sales at the Uni v e r s i t y . To a r r i v e at a reasonable forecast of future earnings, the trend method was employed which involved p r o j e c t i n g forward a le a s t squares trend l i n e . Sales were projected on a per capita consumption basis to minimize the e f f e c t of i n f l a t i o n and p r i c e increases. The i n i t i a l cash outlay for the investment was estimated to be $280,820. The cash receipts and cash disbursements were calculated and discounted f o r the f i v e year period i n order to determine the net present value f o r each estimate (high and low). Both estimates proved to be negative, i n d i c a t i n g that the investment proposal (for a u n i v e r s i t y -owned vending operation) could be rejected. Using the same projected sales f i g u r e s , commissions on these sales paid to the Food Services Department were estimated on a high and a low basis as an a l t e r n a t i v e to the investment proposal. Discounting these expected cash inflows at 10% and 10%%, the net present values were p o s i t i v e . The net present values f o r the investment proposal were considerably lower because the investment proposal included the complete repayment of the investment outlay i n the f i r s t f i v e year period. However, i f we were to consider the investment on a long term basis (longer than a period of f i v e years), the ongoing economic benefits could j u s t i f y the acceptance of the investment proposal. Another consideration f o r supporting t h i s acceptance includes the p o s s i b i l i t y that under the present system, the f u l l p o t e n t i a l of the u n i v e r s i t y vending operation may now not be r e a l i z e d by an outside firm. Perhaps the greatest consideration i s the need for better planning and c o n t r o l and greater f l e x i b i l i t y of the vending operation. In order to reduce costs i n the manually operated food service units i t w i l l be necessary to r e l y more and more on vending machines to provide service. The economic benefits derived from the a b i l i t y to d o v e - t a i l the vending service with the university-operated services may far exceed the reduced benefits received i n the form of commissions. Vending as a r e t a i l i n g means has great growth p o t e n t i a l , e s p e c i a l l y at the Un i v e r s i t y of B r i t i s h Columbia. There i s no doubt that with the expected growth i n the s i z e of the u n i v e r s i t y population and the geographical area i t covers, that there w i l l be an increased demand i n both the number and the type of machines. The trend towards automated food services can only be stronger i n the years ahead. Where vending machines were once looked upon as "only a supplement" to store s e l l i n g , the industry today i s pushing the concept of using vending machines as a primary market. The future p o s s i b i l i t i e s for t h i s part of the industry do indeed look promising i n the l i g h t of modern engineering advances which w i l l make the automated vending of almost anything a r e a l i t y , and also because modern modes of l i v i n g make t h i s type of service desirable, i f not e s s e n t i a l . 96 APPENDIX Appendix A - l Per Capita Consumption of Vending Products as Sold Through Food Services Department-Commissioned Machines f o r the Years 1970-71 to 1974-75 Year Population Cigarettes Cold Drinks Hot Drinks Candy # of Pkgs Per Capita Consumption # of Cups Per Capita Consumption # of Cups Per Capita Consumption # of Bars Per Capita Consumption (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 1970-71 25,620 86,321 3.4 141,241 5.5 182,721 7.1 154,728 6.0 1971-72 24,746 75,837 3.1 122,162 4.9 165,915 6.7 152,991 6.2 1972-73 24,271 71,471 2.9 103,872 4.3 221,191 9.1 189,992 7.8 1973-74 25,420 67,130 2.6 191,866 7.6 366,894 14.4 327,426 12.9 1974-75 27,470 51,289 1.9 199,862 7.3 389,625 14.2 315,270 11.5 Sources: Column 2: See Table 2. Column 3, 5, 7, 9: Food Services Department Column 4: Col. (3) divided by Col. (2). Column 6: Col. (5) divided by Col. (2). Column 8: Col. (7) divided by Col. (2). Column 10: Col. (9) divided by Col. (2). 98 Appendix B - l Cigarette Vending Sales f o r the Period September 1973 to August 1975 Expressed i n Physical Units Year Alma Mater Society Food Services Dept. Tot a l No. of Pkgs. # of Pkgs Market Share # of Pkgs Market Share (1) (2) (3) (4) (5) (6) 1973-74 12,595 15.8% 67,130 84.2% 79,725 1974-75 11,763 18.7% 51,289 81.3% 63,052 Appendix B-2; Cold Drink Vending Sales f o r the Period September 1973 to Agust 1975 Expressed i n Physical Units Year Alma Mater Society Food Services Dept. Total No. of Cups # of Cups Market Share # of Cups Market Share (1) (2) (3) (4) (5) (6) 1973-74 122,433 39% 191,866 61% 314,299 1974-75 121,800 38% 199,862 62% • 321,622 99 Appendix B-3 Hot Drink Vending Sales f or the Period September 1973 to August 1975 Expressed i n Physical Units Year Alma Mater Society Food Services Dept. T o t a l No. of Cups # of Cups Market Share # of Cups Market Share (1) 1973- 74 1974- 75 (2) 241,400 200,698 (3) 39.7% 34.0% (4) 366,894 389,625 (5) 60.3% 66.0% (6) 608,294 590,323 Appendix B-4 Candy Vending Sales f or the Period September 1973 to August 1975 Expressed i n Physical Units Year Alma Mater Society Food Services Dept. Tot a l No. of Bars # of Bars Market Share # of Bars Market Share (1) 1973- 74 1974- 75 (2) 204,581 202,374 (3) 38.5% 39.0% (4) 327,426 315,270 (5) 61.5% 61.0% (6) 532,007 517,644 Sources: Column 2: Alma Mater Society. Column 3: Col. (2) divided by Col. (6). Column 4: Food Services Department. Column 5: Col. (4) divided by Col. (6). Appendix C Per Capita Consumption of Vending Products as Sold Through Vending Machines Commissioned to the Alma Mater Soceity and the Food Services Department for the period September 1973 to August 1975 Year Population Cigarettes Cold Drinks Hot Drinks Candy # of Pkgs Per Capita Consumption # of Cups Per Capita Consumption # of Cups Per Capita Consumption # of Bars Per Capita Consumption (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 1973-74 25,420 79,725 3.1 314,299 12.4 608,294 23.9 532,007 20.9 1974-75 27,470 63,052 2.3 321,662 11.7 590,323 21.5 517,644 18.8 Sources: Column 2: See Table 2. Column 3: Alma Mater Society and the Food Services Department. Column 4: Col. (3) divided by Col. (2). Column 5, 7, 9: Alma Mater Society and the Food Services Department Column 6: Col. (5) divided by Col. (2). Column 8: Col. (7) divided by Col. (2). Column 10: Col. (9) divided by Col. (2). 101 Appendix D The Method of Least Squares As mentioned before, the technique employed to project future product sales involves mathematically f i t t i n g an appropriate least squares trend line to historical data and projecting i t forward. Observed data such as the per capita sales of vended products, is plotted on a two-dimensional graph and is called a scatter diagram. Using this diagram, a line can be drawn approximating the relationship between two variables represented by the Y and X axes. In linear regression analysis the line is straight and the criterion used to f i t i t to the scatter of Y and X points is that of least squares. The criterion of least squares is met when the sum of the squares of the distances between the observed values of the dependent variable, Y, and the estimated values Y (represented by the line) is minimum. In other words, we want to choose the line that comes as close as possible to a l l of the individual observations. This method w i l l produce a function that yields the smallest value for the sum of the squares of the differences between the actual and the estimated values of the dependent variable. Using the symbol e to represent the distances (the vertical deviations of the points from the li n e ) , the least squares criterion can be stated as follows: n 2 e. 1 is minimum i=l where Y Y e. l Y - Y_L (the residual) the observed value of the dependent variable the estimated value of the dependent variable n the total number of observations i the number of the observation 102 Appendix D-la Computations f or Linear Regression Analysis of the Number of Packages of Cigarettes Sold Through Food Services Department-Commissioned Vending Machines, September 1970 to August 1975 Year X Y x = X - X y = Y - Y 2 X xy (1) (2) (3) (4) (5) (6) (7) 1970-71 0 3.4 -2 .62 4 -1.24 1971-72 1 3.1 -1 .32 1 - .32 1972-73 2 2.9 0 .12 0 1973-74 3 2.6 1 .18 1 - .18 1974-75 4 1.9 2 .88 4 -1.76 £X = 10 £Y = 13.9 ix2 = 10 €xy = -3.5 X = 2 Y = 2.78 -The required equation y = ( ^ 2 ~ ) x becomes y = ^Q~'x of y = -.35x which can be written Y - 2.78 = -.35(X-2) or Y = 3.48 - .35X where the o r i g i n X = 0 i s the year 1970 and the units of X are 1 year. The graph of t h i s l i n e , c a l l e d the trend l i n e , i s shown i n F i g . 11. Using t h i s equation (Y = 3.48 - .35X) the consumption of cigarettes can be estimated for the following f i v e years. Appendix D-lb Estimated Number of Packages of Cigarettes Per Capita Sold Through the Food Services Department-Commissioned Vending Machines f or the Period September 1975 to August 1980 Year X Y = 3.48 - .35X (1) (2) (3) 1975-76 5 1.73 1976-77 6 1.38 1977-78 7 1.03 1978-79 8 .68 1979-80 9 .33 103 Appendix D-2a Computations for Linear Regression Analysis of the Number of Cups of Cold Drinks Sold Through Food Services Department-Commissioned Vending Machines, September 1970 to August 1975 Year X' Y x = X - X y = Y - Y 2 X xy (1) (2) (3) (4) (5) (6) (7) 1970-71 0 5.5 -2 - .42 4 .84 1971-72 1 4.9 -1 -1.02 1 1.02 1972-73 2 4.3 0 -1.62 0 0 1973-74 3 7.6 1 1.68 1 1.68 1974-75 4 7,3 2 1.38 4 2.76 i x = 10 <Y = 29.6 X = 2 Y = 5.92 <x2 = 10 ixy = 6.3 The required equation y = (~J^)X becomes y = ~ ~ o r y = .63x which can be written Y - 5.92 = +.63(X - 2) or Y = 5.92 + .63X - 1.26 or Y = 4.66 + .63X where the o r i g i n X = 0 i s the year 1970 and the units of X are 1 year. The graph of t h i s l i n e i s shown i n F i g . 11. Using t h i s equation (Y = 4.66 + .63X) the consumption of cold drinks can be estimated for the following f i v e years. Appendix D-2b Estimated Consumption of Cold Drinks Per Capita as Sold Through the Food Services Department-Commissioned Vending Machines f or the Period September 1975 to August 1980 Year X Y = 4.66 + .63X (1) (2) (3) 1975-76 5 7.81 1976-77 6 8.44 1977-78 7 9.07 1978-79 8 9.70 1979-80 9 10.33 104 Appendix D-3a Computations for Linear Regression Analysis of the Number of Cups of Hot Drinks Sold Through Food Services Department-Commissioned Vending Machines, September 1970 to August 1975 Year X Y x = X - X y = y - Y 2 X xy (1) (2) (3) (4) (5) (6) (7) 1970-71 0 7.1 -2 -3.2 4 6.4 1971-72 1 6.7 -1 -3.6 1 3.6 1972-73 2 9.1 0 -1.2 0 0 1973-74 3 14.4 1 4.1 1 4.1 1974-75 4 14.2 2 3.9 4 7.8 ix = io <Y = 51.5 X = 2 Y = 10.3 £x2 = 10 <xy =21.9 The required equation y = becomes y = ^ x or y = 2.19x which can be written Y - 10.3 = 2.19 (X-2) or Y = 5.92 + 2.19X where the o r i g i n X = 0 i s the year 1970 and the units of X are 1 year. The graph of t h i s l i n e i s shown i n Figure IV. Using t h i s equation (Y = 5.92 + 2.19X), the consumption of hot drinks can be estimated f o r the following f i v e years. Appendix D-3b Estimated Consumption of Hot Drinks Per Capita as Sold Through the Food Services Department-Commissioned Vending Machines for the Period September 1975 to August 1980 Year X Y = 5.92 + 2.19X (1) (2) (3) 1975-76 5 16.91 1976-77 6 19.06 1977-78 7 21.25 1978-79 8 23.44 1979-80 9 25.63 105 Appendix D-4a Computations for Linear Regression Analysis of the Number of Candy Bars Sold Through Food Services Department-Commissioned Vending Machines, September 1970 to August 1975 Year X Y x = X - X y = y - Y 2 X xy (1) (2) (3) (4) (5) (6) (7) 1970-71 0 6.0 -2 -2.88 4 5.76 1971-72 1 6.2 -1 -2.68 1 2.68 1972-73 2 7.8 0 -1.08 0 0 1973-74 3 12.9 1 4.02 1 4.02 1974-75 4 11.5 2 2.62 4 5.24 i x = 10 <Y = 44.4 X = 2 Y = 8.88 Cx2 = 10 <xy = 17.7 The required equation y = (j^)* becomes y = ( ^  )x or y = 1.77x which can be written Y - 8.88 = 1.77(X-2) or Y = 5.34 + 1.77X where the o r i g i n X = 0 i s the year 1970 and the units ofX are 1 year. The graph of t h i s l i n e i s shown i n Figure V. Using t h i s equation (Y = 5.34 + 1.77X) the con-sumption of candy bars can be estimated f o r the following f i v e years. Appendix D-4b Estimated Consumption of Candy Bars Per Capita as Sold Through the Food Services Department-Commissioned Vending Machines f or the Period September 1975 to August 1980 Year X Y = 5.34 + 1.77X (1) (2) (3) 1975-76 5 14.19 1976-77 6 15.96 1977-78 7 17.73 1978-79 8 19.50 1979-80 9 21.27 106 Appendix E Interest Expense Schedule 1975 -76 1976-77 1977-78 1978 -79 1979-80 Amount of loan $280, 820 $280,820 $243,487 $189, 674 $107,770 Loan Repayment -0- 37,333 53,813 71, 904 93,851 Balance of loan 280, 820 243,487 189,674 107, 770 13,919 Interest Expense 28, 082 24,349 18,967 10, 777 1,392 Balance 37, 333 53,813 71,904 93, 851 116,088 BIBLIOGRAPHY 108 BOOKS Anderson, Theodore R. and Z e l d i t c h , Morris J r . A Basic Course i n S t a t i s t i c s . 2d ed. New York: Holt Rinehart and Winston, 1968. Bierman, Harold J r . and Smiot, Seymour. The C a p i t a l Budgeting Decision. 2d ed. Toronto: Collier-MacMillan Canada, Ltd., 1970. Gardner, Jerry G. Contract Food Service Vending. Published by In s t i t u t i o n s Volume Feeding Magazine. D i s t r i b u t e d by Canners Books, Boston, 1973. Goeldner, Charles R. Automatic Merchandising. Chicago: American Marketing Association, 1963. Haberler, G o t t f r i e d . I n f l a t i o n - i t s Causes and Cures. Washington: American Enterprise Association, 1961. H a z l i t t , Henry. What you should know about I n f l a t i o n . New Jersey: D. Van Nostrand, 1965. H e l f e r t , E r i c h A. Techniques of F i n a n c i a l Analysis. Homewood: Richard D. Irwin, 1963. Linderholm, Clara. E s t a b l i s h i n g and Operating an Automatic Merchandising  Operation. Washington: U.S. Department of Commerce, 1946. L i p p i t , Vernon G. S t a t i s t i c a l Sales Forecasting. New York: F i n a n c i a l Executive's Research Foundation, 1969. Marks, Norton E. Vending Machines: Introduction and Innovation. Bureau of Business Research, The Univ e r s i t y of Texas at Austin, 1969. Marshall, Martin. Automatic Merchandising. Boston: D i v i s i o n of Research Graduate School of Business Administration, Harvard U n i v e r s i t y , 195.4. P h i l l i p s , Charles F. and Duncan, Delbert J . Marketing: P r i n c i p l e s and  Methods. 4th ed. Homewood: Richard D. Erwin, 1960, pp. 133-135. Reed, Walter W. Starting and Managing A Small Automatic Vending Business. Washington: Small Business Administration, Superintendant of Documents, U.S. Government P r i n t i n g O f f i c e , 1967. Reichard, Robert S. P r a c t i c a l Techniques of Sales Forecasting. New York: McGraw-Hill, 1966. 109 Rogers, John L. Automatic Vending Merchandising Catering. London Food Trade Press, 1958. Schreiber, G.R. Automatic S e l l i n g . New York: John Wiley & Sons, 1954. Stanton, William J . Fundamentals of Marketing. New York: McGraw-Hill, 1964, pp. 299-301. Van Home, James C. F i n a n c i a l Management and P o l i c y . 2d ed. Englewood C l i f f s : P r e n t i c e - H a l l , 1971. Wentz, Walter B. Marketing Research: Management and Methods. New York: Harper & Row, 1972. Weston, J . Fred and Bigham, Eugene F. Managerial Finance. 2d ed. Holt, Reinhart & Winston, 1966. GOVERNMENT DOCUMENTS S t a t i s t i c s Canada. Vending Machine Operators. 1972. Information Canada, Merchandising and Services D i v i s i o n , January 1974. (Catalogue 62-213 Annual). S t a t i s t i c s Canada. Vending Machine Operators. 1973. Information Canada, Merchandising and Services D i v i s i o n , January 1975. (Catalogue 62-213 Annual). PERIODICALS Bacon, Paul A. "Why a Do-It-Yourself Vending Operation." College and  Univ e r s i t y Business, Vol. 34 No. 1 (January 1963), pp. 49-51. Burge, Frank. "How to Expand Food Service Automatically." College and  Univ e r s i t y Business, Vol. 33 (September 1962), pp. 73-77. Dalrymple, Douglas J . " W i l l Automatic Vending Topple R e t a i l Precedents? Journal of R e t a i l i n g , (Spring 1963), pp. 27-29. England, Wilbur B. "Automatic Merchandising." Harvard Business Review, (November - December 1953), pp. 87-94. Goeldner, Charles R. "Automation - Evaluation i n R e t a i l i n g . " Business  Horizons, (Summer 1962), pp. 89-97. "Highlights i n Vending's History." Vend Magazine, January 1972, p.188. 110 "How W i l l Vending Boom A f f e c t S e l l i n g ? " P r i n t e r s ' Ink, 30 October 1959, pp. 65-68. Manning, W.J. "Automatic S e l l i n g : A Business i n B i l l i o n s . " The  Management Review, (October 1960), pp. 15-22. S t e r n f i e l d , Aaron. "Gangway for the Robot Salesmen." The Rotarian, (January 1964), pp. 30-33. "The Vending Scene i n Canada." Canadian Vending Magazine, 1972, pp. 9-13. "What's Happening to Vending Machines?" Canadian Grocer, 10 May 1958, p. 49. UNPUBLISHED WORKS Baxter, A l l e n . Personal interview. January, 1975. Forecasting Sales - Studies i n Business P o l i c y #106. A Research Report from the Conference Board. National I n d u s t r i a l Conference Board, Inc., New York, 1964. Land, John. Personal interview. January, 1975. Taylor, Joan. Personal interview. October, 1974. Taylor, Joan W. "Accounting i n the F i e l d of Automatic Merchandising." Vancouver, B.C., Society of I n d u s t r i a l and Cost Accountants of B.C., unpublished essay, 1961. Weatherspoon, Jim. Rowe International of Canada Limited, Vancouver, B.C. October 1974. 

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