Homework for Wednesday 4th March

Youssef’s Accessories

Youssef and his wife Charvi lived in Evesham, a small town 30 miles from Birmingham.  Charvi had a secure, well-paid job as an accountant, and she supported Youssef’s plan to give up his job and set up his own business.  

He considered a business selling fashion accessories, such as watches, bracelets, hats and scarves.

Youssef’s primary market research showed two main reasons for the recent growth of accessories stores.
  

Reasons for the recent growth of accessories stores:

Fashion changes in favour of wearing accessories.

Rising incomes of many young female consumers, the main buyers of accesories

                                                                                                                                                                                                                                                                                                        

                                                                        

Youssef found two alternative businesses that he could run.

Option 1 was an empty store in Evesham.  

Youssef was keen on the idea of running a ‘fair trade’ business, paying good prices to its suppliers in Africa and Asia, so that the workers could earn a reasonable living.  

Ideally, he wanted to target two market segments:

Young female consumers.
Consumers who were prepared to pay higher prices to support fair trade, giving more scope for adding value.

Option 2 was an Echo Accessories plc franchise store available in Birmingham.  

Echo Accessories stores did not stock many ‘fair trade’ accessories but Charvi believed that it would be less risky than a ‘fair trade’ store, as the brand name was widely recognised.  

In Birmingham, for example, total weekly sales of accessories were £80,000; Echo Accessories stores accounted for £28,000 of this figure. 

Large organisations, such as Echo Accessories plc, did not compete in small towns, such as Evesham because demand was much lower and distribution costs were relatively high.

Youssef had saved £30,000 and arranged an overdraft of up to £15,000 with his bank.  

He prepared the financial forecasts for each of the options (see Table 1) although Charvi pointed out that he should consider the opportunity cost of his decision to give up his job to become self-employed.

Table 1:  Youssef’s Financial Forecasts

	Option 1: Independent business in Evesham	Option 2: Franchise from Echo Accessories in Birmingham
Annual fixed costs	£40,000	£30,000
Average selling price	£10	£6
Average variable costs per unit	£3.00	£2.25
Annual sales volume (2009)	12,000 accessories	24,000 accessories

 Additional Information

Option 1

This would require Youssef to work 10 hours more per week than Option 2.

Sales would start at a lower level but with greater scope for growth, as Youssef planned to use the internet to attract people who searched for ‘fair trade’ products.

Sales would be much more unpredictable than for Option 2

Option 2

   Echo Accessories would provide all accessories and services such as training and advertising.

Table 2:  Youssef’s Annual Cash Flow Forecasts

	Option 1: Independent business in Evesham		Option 2: Franchise from Echo Accessories in Birmingham
	2009	2010	2009	2010
Opening Balance	(12,000)	(12,000)	(2,000)	7,000
Cash inflow (sales)	120,000	176,000	144,000	144,000
Cash outflows	120,000	115,000	135,000	120,000
Closing balance	(12,000)	49,000	7,000	31,000

1. What is meant by ‘adding value’? [2]

2. What is meant by 'market research' [2]

3. Calculate Echo Accessories plc’s market share of accessories in Birmingham. [4]

4. Calculate the break-even quantity for accessories in 2009 for Option 2: Echo Accessories franchise store in Birmingham. [4]

5. Youssef has a business objective to maximise profits. 

Evaluate the two location options and recommend which one should be chosen to maximise profits in the long run. [20]