Karate Kids

Case Prompt

• Your client is Sarah Jones, the owner of Karate Kids (KK). KK is a very popular, up-scale karate studio in Chicago known for high quality instruction and a relaxed vibe.
• Sarah Jones has owned and operated KK for the past 5 years. For its first four years, KK was very financially successful; however in the past year, Sarah noticed that her profits seem to be declining.
• She doesn’t keep very good financial records and has made a few big investments lately, so is having a hard time figuring out
  • a) whether she is actually losing profit and
  • b) how to fix her financial woes.
• How do you help Sarah?
  

---

General response summary

• Note: This case requires extensive guidance by the interviewer. Make sure to review carefully before giving.
• Provide the following background information upon request, or to help provide clarity after the initial framework:
  • KK offers 5 classes daily on weekdays. On weekends, they offer 4 classes. All of their classes are “Shito-ryu” style
  • KK clients pay on a per-class basis. There are currently no “package” deals or membership rates.
  • The competitive landscape for karate studios in Chicago has remained unchanged over the past three years.
  • Sarah’s recent investments were major maintenance upgrades for her studio (installing hardwood floors, fresh paint, and new shower facilities). These investments were financed primarily through loans.

Analysis

• The candidate should quickly get to a π = Revenue – Cost framework.
• Framework considerations may include:
  • Revenue:
    • Price per class
    • Number of clients per class
    • Potential other sources of revenue (i.e., dress, belts, water bottles, etc.)
  • Cost:
    • Rent
    • Insurance
    • Instructors
    • Utilities
    • Loan payments
  • Other Considerations (a strong candidate will think of these):
    • Potential decline in popularity of karate
    • Marketing promotions
    • etc.

Information on Cost (provide when asked)

• No variable costs on a per-customer basis – all costs are fixed.
• 5 main fixed costs:
  • Rent/utilities building = $3500 a month
  • Liability Insurance = $1800 a year
  • Administration costs (including owner salary, supplies, computer system, marketing supplies) = $800 a week
  • Karate instructor salaries = $50 a class
  • Loan Payments (to pay off major paint/floor/plumbing renovations) = $500 a month

Information on Revenue (provide when asked)

• Class fees are KK’s only source of revenue
• All classes cost $12 and there are average of 8 students per class on weekdays and 6 students per class on weekends
• Assume every month has 22 weekdays and 8 weekend days

Calculations

• Revenue:
  • Weekdays:
    • $12 per class x 5 classes per day x 8 students per class x 22 weekdays
    • = $10,560 a month
  • Weekends:
    • $12 per class x 4 classes per day x 6 students per class x 8 weekend days
    • = $2304 a month
  • Total Revenue per month = $12,864 (can be rounded to $12.8K)
• Costs:
  • Monthly costs
  1. $3500 rent
  2. $150 insurance per month ($1800/12)
  3. $3200 admin per month
  4. $5500 karate teacher salaries on weekdays
  5. $1600 karate teacher salaries on weekends
  6. $500 loan payments
  • Total Costs per month = $14,450 (can be rounded to $14.5K)
• After being provided information on cost and revenue, the candidate should realize that Yoga Jones currently is losing approximately $1.7K ($1650) a month in profit.