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]

A/S Business Homework for Wednesday 26th February

Love Wood

At school, Padma developed and patented a technique for joining different woods together to create a patterned effect. This patented process improved efficiency allowing Padma to produce more cheaply than competitors.  A large company offered to buy the patent, but Padma decided to keep it and run a small, sole trader business, making and selling individually designed wooden toys.  During this time, she built up an expertise in selling through the internet.

Padma’s friend, Emily, was a brilliant toy designer and so Padma asked Emily to create a new business with her.  Padma changed her sole trader business to a private limited company called Love Wood Ltd with Emily receiving 40% of the shares.

Before starting the new business, Emily designed some new toys which Padma made.  Emily carried out some market research which included showing these toys to potential customers.  She discovered that most of the interest in Love Wood Ltd’s products would come from grandparents who wished to buy presents for their grandchildren especially at Christmas.  She then conducted some qualitative market research through a small focus group of grandparents and found that they were most likely to buy old-fashioned, traditional wooden toys.  They particularly liked the fact that Padma used long-lasting tropical hardwood in different colours. The combination of Emily’s designs and Padma’s patented technique would provide the business with a unique feature.

Emily carried out some quantitative market research on individually designed wooden toys, using both primary and secondary market research.  This is summarised in Figure 1. She also calculated the variable costs shown in Figure 2.

Figure 1:  Results of market research into the UK market for individually designed wooden toys.

Average selling price for an individually designed wooden toy	£83
Annual sales forecast for Love Wood Ltd’s first year, 2020	4,000 toys
Annual growth forecast for Love Wood Ltd 2020-2022	25% per annum
Annual growth forecast for UK market for individually designed wooden toys	10% per annum
Data on largest competitor in the market:           Sales value                                                                        Market share	£2.4 million 25.6%

Figure 2: Variable costs for Love Wood Ltd

Item	Variable cost per toy (£)
Raw materials	15
Labour costs	5
Transport to customer	4

Projected sales were high but unpredictable, so Padma suggested that Love Wood Ltd should recruit a mix of permanent and temporary employees.

Padma and Emily used their market research to help them to decide on the objectives for their business start-up.  These objectives were to:

Achieve annual sales revenue of over £500,000 in 2022.
Gain a reputation for high quality wooden toys.
Open up its own High Street store by 2022.

Padma’s father warned them to be cautious as the expected increase in popularity of individually designed wooden toys was encouraging competition to enter the market.

They drew up a business plan and a cash flow forecast for their first year’s training (Figure 3).  The demand for individually designed wooden toys was expected to be very seasonal.

Figure 3:  Forecast cash flow for 2020

First year of trading of Love Wood Ltd

	Jan to March (£)	April to June (£)	July to Sept (£)	Oct to Dec (£)
Cash inflows	41,500	49,800	74,700	166,00
Wages *	34,000	34,000	40,000	44,000
Materials and other costs	34,800	25,400	39,000	48,300
Cash outflows	68,800	59,400	79,000	92,300
Net cash flow for quarter	(27,300)		(4,300)	73,700
Opening balance		(1,700)	(11,300)	(15,600)
Closing balance	(1,700)	(11,300)	(15,600)	58,100

* Including payments to Padma and Emily

1 (a) Based on the data in Figures 1 and 2, calculate the forecast ‘total contribution’ for Love Wood Ltd in 2020. [4]

1 (b) Complete the cash flow forecast (Figure 3) by calculating the missing figures for:

 (i) the opening balance for January to March [2]

 (ii) the net cash flow for April to June. [2]

1 (c) Padma wants to know the total size of the UK market for individually designed wooden toys. Based on the data in Figure 1, calculate the size of the market in 2020. [4]

2 Assess on the basis of the evidence provided, whether Love Wood Ltd is likely to achieve its start-up objectives. [10]

AS Business Homework for 05.02.20

Marvin – Mr Motivator!

As a teenager, entrepreneur Marvin Burton battled with his weight. By the time Marvin left school he was 16 stone (100 kgs), so he decided to work in the fitness industry to try and help overcome his weight problem. Marvin worked in a number of roles from gym receptionist, aerobics instructor and personal trainer. Marvin studied and often undertook training in areas such as sports massage therapy, diet and nutrition.

In 2008, Marvin started his own fitness company, Advanced Conditioning Ltd as a private limited company. This helped him raise the share capital he needed. He often worked with professional sports people on a one-to-one basis. Marvin also ran group exercise classes. Since much of his work required him to be flexible, he set up an office at home. When Marvin needed a fitness studio or large equipment for his clients, he simply hired it, often from well-known health club chains, such as Virgin Active.

Since 2011, Marvin has teamed up with four other self-employed professional sports trainers, a masseur and a chef, to provide exclusive well-being stay away breaks. The team, operating collectively as Fitness Retreat Ltd, hire luxury countryside venues such as The Lindens, in Dorset. The Lindens is a fabulous 18th century manor house which has a heated swimming pool, all-weather tennis courts and acres of amazing woodland and gardens – the perfect setting for a great fitness getaway.

Fitness Retreat Ltd offers its breaks across the UK for four or seven days. Those who attend learn about exercise, nutrition, motivation, recovery and general well-being. The team use well-proven methods to achieve great results in weight loss and fat burn.

        (a) What is meant by an entrepreneur?     (2)

(b) What is meant by private limited company?       (2)

(c) Explain one way Advanced Conditioning Ltd might increase its sales revenue.               (4)

(d) Explain how Advanced Conditioning Ltd’s variable costs might increase.                   (4)

        (e) Assess one benefit to Advanced Conditioning Ltd of                   having a business plan.                  (8)