Prepare balance sheets for end of each semester.

Edwina Haskell was anaccomplished high school student who looked forward to attendingSouthern New England University (SNEU). SNEU was unique in that itoperated on a trimester basis, its policy was to actively fosterindependent development among the students. Edwina’s mother andfather each own their own small businesses. Soon after freshmanorientation at SNEU, Edwina recognized a need among the studentsthat could be the basis for developing a small business. Freshmanstudents could not bring their cars on the campus. In effect, theywere confined to the dorm; if they wished to travel, they had totake school-provided buses that operated on a fixed schedule.Further, the university’s cafeteria closed at eight in the evening.Students who wanted to have some food or snacks after 8:00 p.m. hadto call local restaurants that delivered. The few restaurants inthe neighborhood around SNEU that had delivery services often werelate in their deliveries, and hot food, such as pizza, wasfrequently delivered cold.

Edwina felt that therewas a niche market on the campus. She believed that students wouldbe interested in ordering sandwiches, snacks, and sodas from afellow student provided that the food could be delivered in atimely fashion. After talking with several students in her dormcomplex, she believed that offering a package of a sandwich, asoda, and a small snack, such as potato chips, for $5 and aguaranteed delivery of 15 minutes or less would be a winner.Because her dorm complex consisted of four large adjoiningbuildings that house nearly 1,600 students, she felt that therewould be sufficient demand to make the concept profitable. Shetalked about this concept with her roommates and with her parents.Her roommates were willing to help prepare the sandwiches anddeliver them. She planned on paying each of them $250 per trimesterfor taking orders, making sandwiches, and delivering them. Allthree roommates, whom she knew from high school, were willing to bepaid at the end of the trimester.

Edwina recognized thatfor this business plan to work, she would have to have a sufficientinventory of cold cuts, lettuce, tomatoes, soda, chips, andcondiments to be able to meet student demands. The smallrefrigerators in the dorm rooms would not be sufficient. Aftertalking to her parents, they were willing to help her set up herbusiness. They would lend her $1,000 to buy a larger refrigeratorto place in her dorm room. She did not have to repay this loanuntil she graduated in four years, but her parents wanted her toappreciate the challenges of operating a small business. They setup several conditions. First, although she did not have to pay backthe $1,000 for the refrigerator for four years, she had to payinterest on this “loan.” She had to repay 3 percent of this loaneach trimester. Further, they reminded her that although she couldpay her friends at the end of the semester, she would need funds tobuy the cold cuts, bread, rolls, soda, snacks, condiments, andsupplies such as foil to wrap the sandwiches, plus plates and paperbags. Although Edwina was putting $500 of her own money into herbusiness, her parents felt that she might need an infusion of cashduring the first year (i.e., the first three trimesters). They werewilling to operate as her bank—lending her money, if needed, duringthe trimesters. However, she had to pay the loan(s) back by the endof the year. They also agreed that the loan(s) would be at a rateof 2 percent per trimester.

Within the first threeweeks of her first trimester at SNEU, Edwina purchased the $1,000refrigerator with the money provided by her parents and installedit in her dorm. She also went out and purchased $180 worth ofsupplies consisting of paper bags; paper plates; and plasticknives, spoons, and forks. She paid for these supplies out of heroriginal $500 personal investment. She and her roommates would goout once or twice a week, using the SNEU bus system to buy whatthey thought would be the required amount of cold cuts, bread,rolls, and condiments. The first few weeks’ worth of supplies werepurchased out of the remainder of the $500. Students paid in cashfor the sandwiches. After the first two weeks, Edwina would pay forthe food supplies out of the cash from sales.

In the firsttrimester, Edwina and her roommates sold 640 sandwich packages,generating revenue of $3,200. During this first trimester, shepurchased $1,710 worth of food supplies. She used $1,660 to makethe 640 sandwich packages. Fortunately, the $50 of supplies werecondiments and therefore would last during the two-week breakbetween the trimesters. Only $80 worth of the paper products wereused for the 640 sandwich packages. Edwina spent $75 putting upposters and flyers around the campus promoting her new business.She anticipated that the tax rate would be approximately 35 percentof her earnings before taxes. She estimated this number at the endof the first trimester and put that money away so as to be able topay her tax bill.

During the two weeksoff between the first and second trimester, Edwina and herroommates talked about how they could improve business operations.Several students had asked about the possibility of having warmsandwiches. Edwina decided that she would purchase two Paninimakers. So at the beginning of the second trimester, she tappedinto her parents’ line of credit for two Panini grills, which intotal cost $150. To make sure that the sandwiches would bedelivered warm, she and her roommates spent $100 on insulatedwrappings. The $100 came from cash. The second trimester proved tobe even more successful. The business sold 808 sandwiches,generating revenue of $4,040. During this second trimester, thebusiness purchased $2,100 worth of food supplies, using $2,020 ofthat to actually create the 808 sandwich packages. They estimatedthat during the second trimester, they used $101 worth of suppliesin creating the sandwich packages.

There was only aone-week break between the second and third trimesters, and theyoung women were quite busy in developing ideas on how to furtherexpand the business. One of the first decisions was to raise thesemester salary of each roommate to $300 apiece. More and morestudents had been asking for a greater selection of warmsandwiches. Edwina and her roommates decided to do some cooking inthe dorms so as to be able to provide meatball and sausagesandwiches. Edwina once again tapped into her parents’ line ofcredit to purchase $275 worth of cooking supplies. One of theproblems they noticed was that sometimes students would place callsto order a sandwich package, but the phones were busy. Edwina hireda fellow student to develop a website where students could place anorder and select the time that they would like a sandwich packageto be delivered. The cost of creating and operating this websitefor this third trimester was $300.

This last semester ofEdwina’s freshman year proved to be the most successful in terms ofsales. They were able to fulfill orders for 1,105 sandwichpackages, generating revenue of $5,525. Edwina determined that thedirect cost of food for these sandwich packages came out to be$2,928.25. The direct cost of paper supplies was $165.75. At theend of her freshman year, Edwina repaid her parents the $425 thatcame from her credit line that was used to purchase the Paninimakers and the cooking utensils.