Strategic Financial Diagnostic to Open a Retail Music Store

Résumé du document

We are going to analyze two entrepreneurs situations, Jane and Elizabeth. Both have decided to open a retail music store in a large shopping mall, purchase CDs from the large music distributors, and resell them to the public. Our goal is to analyze this project so that they can make strategic financial choices for their company and be profitable. Their first decision is to determine if they can profit from this venture, so they must perform a Break-even Analysis. Their monthly rent and utilities are $5,000. They will hire one part-time employee who will earn $1,000 per month. They also will have a small advertising budget of $300 per month for a website, posters, and ads in music magazines. Other miscellaneous operating expenses will be $100 per month. In addition to their own contributions, they also took out a simple loan for $40,000 at a 12% annual interest rate (1% per month). The CDs cost them an average of $12 each and they will sell them for $20 each. Another bank has offered them the $40,000 loan at a lower interest rate of 11% per year, but this loan is a discount loan. Is this a better loan for them? The music distributors that sell them their CDs offer terms of 3/10 net 40. Jane thinks that they should not take the discounts since they don't have much extra cash. Elizabeth thinks that they should take the discounts and pay with the company credit card, even though it charges them 22% interest. Who is right?

Extraits

[...] Other miscellaneous operating expenses will be $100 per month. In addition to their own contributions, they also took out a simple loan for $40,000 at a 12% annual interest rate per month). The CDs cost them an average of $12 each and they will sell them for $20 each. Calculate how many CDs they will need to sell each month in order to Breakeven (have a Net Income of zero). First of all, it seems essential to present what a Breakeven Point is. [...]

[...] It is often used for short term loans. In our case Jane and Elizabeth have two loans' propositions: simple loan: for $ at a 12% annual interest rate In order to understand, how much the two girls will have to pay at the end of the year: Interest = 40 000*0,12 = 4,800 It means that they will have to pay $ interest at the end of the first year. discount loan: for $ at a lower interest rate of 11% per year In that case, the calculation is different. [...]

[...] The Breakeven point and analysis is a good way to be able to answer to these questions. So the Breakeven point is a way to know how much goods a company has to sell in order to cover its costs. In order to calculate the Breakeven Cost, Jane and Elizabeth has to determine: (The fixed costs (rent, insurance, computers ) (The variables costs: they will vary according to the change in the volume of production units. (The selling price (the amount they plan to charge customers to buy a single unit of product) (The Quantity (how much product they plan to sell) The Breakeven will be reached if there are no losses and no profit which means that the NET INCOME = 0 Quantity of CD sold Selling Price Purchasing Price Formula: Q*(P-V)-FC-INT FC= Fixed Costs INT= Interests In our case, we have the following elements: - $20 - $12 - FC= $5000 (rent) + $1000 (1salary part-time) + $300 (advertising) + $100 (miscellaneous operating expenses) = $ - INT= per month of our $ loan annual) = $400 (Calculation: Q * FC Int = 0 Q = ( FC + Int ) / ( P V ) Q = ( 6,400 + 400 ) / ( 20 12 ) Q = 6,800 / 8 Q = 850 According to this calculation, Jane and Elizabeth will reach the breakeven point if they sell at least 850 CDs. [...]

[...] Question Discount Loan Another bank has offered them the $40,000 loan at a lower interest rate of 11% per year, but this loan is a discount loan. Is this a better loan for them? Explain why or why not. According to the Investors Words dictionary, a discount loan is loan on which the interest and financing charges are deducted from the face amount when the loan is issued.” This means that the borrower receives the principal only after the financing charges and the interest (here are taken out but it has to repay the full amount of the loan. [...]

[...] Both have decided to open a retail music store in a large shopping mall, purchase CDs from the large music distributors, and resell them to the public. Our goal is to analyze this project so that they can make strategic financial choices for their company and be profitable. Question Breakeven point Their first decision is to determine if they can profit from this venture, so they must perform a Breakeven Analysis. Their monthly rent and utilities are $5,000. They will hire one part-time employee who will earn $1,000 per month. [...]