wac-hifi

7/31/2019 WAC-Hifi

1/10

WAC REPORT

ON THE CASE

HARRYS HI-FI CENTRE

Submitted To : Prof. Sanjay Kumar Gupta

Submitted On : 20th July, 2012

Submitted By : Rohankumar Bhardwaj- 20121046

Samarth Mewada-20121048

7/31/2019 WAC-Hifi

2/10

i

WAC REPORT ON HARRYS HI-FI CENTRE

To : Harry

From : Steven

Date : 20.07.2012

SUB: - Detail analysis report to choose the course of action for cost-effective future.

Dear Harry,

The close evaluation of the earlier & existing business situation, pertaining to Hi-Fi Centre, has been

carried out. The report contains the analysis of the situation and evaluation of the options available for

the future business models. The analysis leads to a decision to buy out the two partners and continue

with the business solitarily.

Thanks

Regards

Steven

Management Consultant, Australia

7/31/2019 WAC-Hifi

3/10

ii


CONTENTS

EXECUTIVE SUMMARY ....................................................................................................... 1

SITUATION ANALYSIS ......................................................................................................... 2

PROBLEM STATEMENT: ...................................................................................................... 4

STATEMENT OF OPTIONS: .................................................................................................. 4

CRITERIA FOR EVALUATIONS:.......................................................................................... 4

EVALUATION OF OPTIONS: ................................................................................................ 5

RECOMMENDATION ............................................................................................................. 5

PLAN OF ACTION .................................................................................................................. 6

ANNEXURE 1 .......................................................................................................................... 7

7/31/2019 WAC-Hifi

4/10

1


EXECUTIVE SUMMARY

Harrys hi-fi centre (high fidelity audio equipment centre), with the reasonable profit, entered into the

partnership business to expand it. But the business failed to make profit. The factors affected the profit

of the business are majorly salary for partners, rent and expense for the up gradation of the shop. Also,

economic volatility and difference in business strategy between the partners affected the business. Itwas a necessity to change the business model. Various criteria are evaluated for the same in the report

and suggestion is to buy out the partners and run the business single headedly as the skill to run the

business is possessed by the proprietor.

Total Words : 109

7/31/2019 WAC-Hifi

5/10

2


SITUATION ANALYSIS

Harrys HiFi centre, with high fidelity equipment, started singlehanded in 1972. Soon, the sales of the

centre increased due to technical advice given to customers, good customer relationships and lowerprofit margins.

Table 1 shows the actual sales data, calculated profit margin and expenditure for the year 1972-73 &

1973-1974. The growth rate shown during the year 1972-1973 & 1973-1974 were taken and depending

upon the ratio, projected data for the year 1974-75 are calculated in Table 2.

Table 1. Actual Sales Data of Harrys Hi-Fi for the year 1972-73 & 1973-74.

Sr.No. Description

Amount ($)

1972-1973 1973-1974

1 Sales 214000 240000

2 Gross Profit 42000 48000

3 Average Profit Margin 19.63 19.63

4 Net Profit 12000 16000

5 Salary 9000 10000

6 Expenditure, Tax, Salary for Assistants 21000 22000

Table 2. Sales Data of Harrys Hi-Fi for the Year 1974-75

Sr.No. Projected 3rd Year- 1974 to 1975 Amount ($)

1 Sales 292000

2 Gross Profit 57308

Average Profit Margin(From Table-1) 19.63

3 Net Profit - Assumed 20000

4 Salary 11000

5 Expenditure, Tax, Salary for Assistants 23000

7/31/2019 WAC-Hifi

6/10

3


After making reasonable profit for three years, it was decided to expand the business with the initial

investment of $60000. And for raising the capital fund, two partners were added to business.

For the new partners, strategy was to target high end customer and to upgrade the shop.

In partnership business, for the six months, there was an increase in gross sales of the business but a netloss for the company. Expenditure on the salary of the partners and rent leads to increase the difference

between Gross profit and net profit as shown in figure 1.

Figure-1 Sales and Profit from 1972 to 1975

Many other factors like expenditure on up gradation, recession, inflation, and shop location were

responsible for this loss. Moreover, new partners were aggressively targeting the higher income group

with higher margin. This was resulted in losing the existing customer from the middle class and uppermiddle class. There were many opportunities with the upper middle class as market penetration of this

class was only 3%.

There was a fundamental difference in the operating and marketing strategy among the partners.

As per Table 1 & Table 2, total expenditure after gross profit is $32000 for proprietor business whereas

in Partnership business net loss of $10000 for gross sales of $30000 depicts that $40000 was the

expenditure. This cost is mainly for the rent and salary of the partners.

If profit margin is increased from 20% to 22%, it will have a negligible burden on customer. Hence,

increasing the profit margin would have not invited the situation of losing customers.

7/31/2019 WAC-Hifi

7/10

4


The merits and demerits of the proprietor business and partnership business on various criteria is

summarised in table 3.

Table 3. Comparison of proprietary and partnership business

Particulars Proprietor Business Partnership Business with Friends

Profit No sharing, high profit Shared among partners

Control Full Control over business Shared or no control over business

DecisionPower

Single headed, No conflict Increases conflict, Shared decision

Cost for

Startup

High capital cost Low capital cost as it is shared

PROBLEM STATEMENT:

To develop a profitable business model which also serves the values that was carried.

STATEMENT OF OPTIONS:

Analysis of the situation of partnership and proprietary business leas to following viable solutions for

the problem.

1) To buy out the two partners by paying $10000 to each and continue with the current businessmodel.

2) To start a new business of loud speaker manufacturing by utilising the business that can bebought out for $20000.

CRITERIA FOR EVALUATIONS:

1) ProfitabilityProfit that will be gained by business model.

2) Possible RiskThe Risk associated with business model will be evaluated.

3) Future ScenarioThe Future scenario for the business model will be evaluated.

4) SustainabilityWhether the business model will sustain in the volatile market?

7/31/2019 WAC-Hifi

8/10

5


EVALUATION OF OPTIONS:

1) To buy out the two partners by paying $10000 to each In the proprietor business, yearly profit will be $9450 (Refer Annexure 1). This Profit will

not be shared. Business with the focus on customer relationship, low profit margin andhigh sales will result in to the higher profit.

This business is having a large customer base of Middle class and Upper working class,hence overall risk is low for this model. Also, technical expertise will strengthen the

consumers share in market.

The business is targeting the Middle class and Upper working class. In future, marketpenetration of this class can be increased from 3% to 6%. Also, the seasonal goods will

result in to the better future sales.

The business has already sustained in the market in early days for about three years.Though sustainability depends on the market trends & economy, good customer base will

result in to the reasonable growth of business even in the weak economy.

2) To start the new business of manufacturing loud speakers To start the business, high capital cost will be required. If we consider the business model

as per annexure 1, it is clear that time required to recover the capital cost is at least 2 years.

So, company will start making profit after recovering the capital cost which is not in the

case of option 1.

There is no prior experience in this field; hence it may not run as expected. Also the goodcustomer base for this business does not exist.

So, the risk factor is high in this case and speculations on future growth cant be made dueto lack of experience.

Sustainability depends on the quality, price and after sale service of products. Thetechnical expertise to produce high quality product will be an added advantage.

RECOMMENDATION

Looking at the profit margin and risk involved, a business model to buy out the other two partners and

continue with the existing business is the best option. Also large customer base will benefit the same.

Hence we recommend to buy out other two partners from existing business.

Further, John D. Rockefeller's famous words say "A friendship founded on business is a good dealbetter than a business founded on friendship."

(Source: www.businessknowhow.com/startup/partnership.htm)

7/31/2019 WAC-Hifi

9/10

6


PLAN OF ACTION

1) Reunite the customers that were lost in partnership business.2) Sell out the assets which were used to upgrade the model in order to repay the debts.3) Market the new business model in order to bring to the customers notice about the change. 4) Once the sale rises hire an assistant and also train him/her in technical manner in order to help

customers in a better way.

5) Raise the profit margin quarterly on the basis of the market condition and sale of a particularproduct in order to sustain in future even in weak economy.

6) Develop the concept of contract based service (not limited to customers who buy products fromcentre) with various attractive offers. This will result in a good customer base and also raise the

revenue of the centre.

Total Word Count : 1003

7/31/2019 WAC-Hifi

10/10

7


ANNEXURE 1

Yearly profit if two partners were bought out and continues with the same businessRemains in Business Amount ($)

Monthly Profit 1050

Tax - 25 % assumed 262.5

Net profit per month 787.5

Profit For One Year 9450

Source: Business model developed by Cyril

Future Business Model of Loud Speaker Manufacturing considering the same sales and profitas of existing business

Capital Cost $20000(Assumed)

Amount ($)

Monthly Sales

1 Sales 20000

2 Gross Profit 4500

3 Average Profit Margin 22.5

4 Net Profit before Tax 1050

5 Investment allowance- 40% of profit 420

6 Total Taxable Profit 630

Profit after tax 472.5

7 Net Profit 892.5

No. of Months Required to recover costof initial investment

22.40896359

wac-hifi

Documents