Steve’s ‘Customised’ Cars
Steve loved ‘customising’ cars (modifying the appearance and features of a car to make it unique). He was so talented that many of his friends in Felltown paid him to ‘customise’ their cars. Eventually he decided to set up his own business.
Steve expected most of his customers to be males aged 18 to 25 years old. He was reluctant to spend much money on market research so he interviewed 50 male contacts by using a questionnaire. He also posted 100 questionnaires to local residents but only 5 were returned.
Steve’s sister, Tina, was surprised that Steve had conducted his market research on his contacts in Felltown. “Felltown was not the right place,” she said. “Midford is much bigger and Bilchester has a much younger population because of its university.” Tina also disagreed that most of his customers would be men. “I am the envy of all of my girlfriends because of the way you customised my Peugeot. Girls may be a better market than boys because they are more likely to pay someone else to customise their cars.”
Steve’s market research showed that he would have 2 different types of customers:
· those who wanted Steve to customise their cars
· those who wanted to customise their own cars.
Steve realised that his premises would need to accommodate both types of customer requirements. He would need car parking, a garage to work on the cars and a space to sell parts and materials to those wishing to customise their own cars.
Steve was worried about the financial aspects of his business. Tina, who was self-employed, advised him to:
1. get a good cash flow as soon as possible
2. budget very carefully
3. find out whether he could benefit from any government support for entrepreneurs.
Steve had little knowledge of budgets. The hardest part was the income (sales) budget as Steve was very unsure about how many customers he would get and the amount that they would pay. His market research suggested that over 75% of the people in his survey would use him and so he set a high income (sales) budget.
To research costs, he visited some existing ‘customised’ car businesses and their websites. He gained a limited idea of their costs and the stock levels held. However, he was concerned to hear rumours of unpredictable changes in the costs of customised parts.
Steve knew how much time it would take to customise a car but was not sure how many employees he would need. Steve decided to employ some students who were prepared to work part-time at the weekends. They would be enthusiastic, quite flexible and prepared to accept a low wage rate.
Steve gathered financial data to forecast his profit from customising cars. This is summarised in Figure 1.
Item
|
Forecast revenue/cost
|
Fixed costs
|
£42,000 per annum
|
Average variable cost per customer
|
£160
|
Average spend (revenue) per customer
|
£440
|
1. Using the figures provided in Figure 1, calculate the ‘total contribution’ from the first 80 customers who wanted Steve to customise their cars. [4]
2. Using the figures provided in Figure 1, calculate the expected profit from customising cars for Steve’s business in its first year of trading, based on the assumption that it will attract 250 customers. [5]
3. Explain two possible advantages to Steve of using part-time employees in his business. [6]
4. Analyse the limitations of Steve’s primary market research. [9]
