Assignment

Stan’s Sound

A report
submitted to

Prof Mukul Vasavada

On
10 Oct 2010
By
Anuj Rawat

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Stan’s Sounds
Lakeview Shopping Center
Westville
Texas

10 Oct 2010
To, Mr Stanley Kramer
From, Anuj Rawat

Subject: Evaluation of Business Proposal for opening of showroom at

Wardlow

1. Refer your directions on exhaustive evaluation of business proposal received

from shopping mall developers at Wardlow.
2. Report on the subject is attached herewith for your perusal.

Anuj Rawat

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Executive Summary
1. Stan’s Sounds had received a business proposal for opening up of store, by
mall developers at Wardlow.
2. In depth analysis of following available options were carried out:-
(a). Accept mall developer offer.
(b). Accept mall developer offer but, store to be run under a franchise
arrangement.
(c). Decline the offer of mall developers and concentrate on Westville
market instead.
3. Option 2 (a) is best, as gains accrued from same outweigh other two other
options.

Word Count : 80

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 CONTENTS

S.No HEADING PAGE No

1. Situation Analysis 5
2. Problem Statement 5
3. Criteria for Evaluation 5
4. Evaluation of Options 6
5. Recommendation 8
6. Action Plan 8
7. Exhibits 10-13

Situation Analysis
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1. Stan’s Sound is operating three stores dealing in sound systems, audio
components and accessories in Westville, Texas. Two stores with name of Stan’s
Sounds sell medium priced sound equipment and related components, while Cen
Tex Audio sells customized sound systems.

2. Cost Incurred. On perusal of comparative balance sheet of all three stores from
1972-77 it is evident that initial cost of opening a showroom is US $ 30,000-
35,000/-which includes inventory of approx 25-30,000 US $ and various assets at
shop like furnishing etc of approx US $ 5,000/- (Exhibit I ).

Problem Statement
3. To select best of the following options:-
(a). Accept mall developer offer.
(b). Accept offer of mall developers but, store to be run under a franchise
arrangement.
(c). Decline the offer of mall developer and concentrate on Westville
Market instead.

Criteria for Evaluation

4. Above mentioned options were evaluated on following criteria for arriving
at a rational recommendation:-
(a). Return on Assets. To measure how well an enterprise has used
available funds. It is calculated by dividing total income by total assets.

(b). Product mix at new store.

(c). Availability of Capital.

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 (d). Operation of store.

Evaluation of Options

5. Accept Mall Developer Offer

(a). Return on Assets. On perusal of data tabulated in Exhibit II it is
evident that so far funds management by firm is good. Although mark up
varies from 20-50%, but after paying recurring expenditures like salaries,
stationary, electricity, rental etc and despite some poor management of
inventory, firm has achieved 25% return on assets. Mall developers must
have carried out a study feasibility study of mall clientele prior to a huge
investment. Also mall developers have come all the way from Wardlow with
offer it is evident that there is a market for stores dealt by firm.

(b). Product mix of new Store. As of now due to inadequate information

about customer choices and preferences at Wardlow, it is proposed that
product mix of new store should include complete range of fast moving
stores of both type of stores located in Westville. Same can be modified
after analyzing sales record of new store after three months or so.

(c). Availability of Capital. As long term liability of firm is periodically

reducing (Exhibit III refers). It is evident that firm must be regularly
paying outstanding loan installments and maintaining a good credit rating
with financial institutions. Also three stores of firm has made a net earning
of US $ 25078 in year 1977 and said amount can be reinvested in opening of
new store at Wardlow.

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 (d). Operation of New Showroom. Daily commuting between Wardlow
and Westville is not possible due to 140 miles distance between them. As Mr
Karmer is not in good health and Mr Porter have small children, both cannot
run store at Wardlow. Hence Mr Howard, Operating Manager and an
experienced hand can be tasked to move to Wardlow for setting up and
running of upcoming new store.

6. Open a store under franchise at Wardlow

(a). Return on Assets. As per data tabulated at exhibit II firm has
achieved 25% return on asset. However when same is given under
franchise , net earnings will go down due to profit sharing but Return on
Asset will go up as firm inventory will remain same.

(b). Product mix of new Store. Coordination of inventory with franchise

may pose problems due to 140 miles distance between two towns. Also
franchise partner may not have adequate experience when compared with
Mr Karmar. This may lead to information asymmetry about producer’s
information and product quality, which may lead to stocking of wrong
product mix thus resulting in dead stock.

(c). Availability of Capital. Capital for setting up of showroom will be

arranged by franchise partner.

(d). Operation of New Showroom. As day to day running of showroom

will be vested with franchise, lack of experience and inefficiency may
adversely affect firm’s goodwill and credibility.

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7. Turn Down the Offer
(a). Return on Assets. As per data tabulated at Exhibit IV firm’s net
sales, gross margin and net earnings for year 1977 are showing a downward
trend. It may be due to market saturation and more competition. Thus it is
advisable to avoid infusion of more capital at this juncture and explore new
areas.

(b). Product mix of new Showroom. Not relevant.

(c). Availability of Capital. Additional capital for enhancing the
inventory of existing stores can be made available from net earnings of three
stores in 1977.

(d). Operation of New Showroom. Not relevant as existing setup will

continue.

RECOMMENDATION
8. Stan Sound’s should accept the offer of mall developer. Thereby apart from
no competition in mall, 15% discount on lease rates and choice of interior décor
will result in reducing cost of establishing new store to a great extent.

ACTION PLAN
9. Stan’s Sound can improve their Return on Assets by adopting following
measures:

(a). Improving their inventory management of stores, wherein Inter store

transfer of stores can be carried out for better productivity and reducing
response time.

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 (b). Coordinate purchase of all stores there by reducing expenditure
incurred in logistics.

(c). Visit Wardlow to get first hand feedback on mall location and demand
survey for stores dealt by firm in forthcoming 60 days.

Word Count : 890

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 Exhibit I

( Refers to para 2 )

Fixed Assets and Inventory

of

Stan Sound’s and Cen Tex Audio Center

S.No Year / 1972 1973 1974 1975 1976 1977

Details

a Fixed 4634 5112 10632 10777 12902 18742

assets
(in US $)
b Inventory 24060 45078 60012 72885 69122 66923 +
of store 27880 =
(in US $) 94813
Only one Only one Second Two Two Cen Tex
store is store is Stan stores are stores are Audio
functional functional Sound functional functional Center
store became
became functional
functional in an
affluent
area

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 Exhibit II

( Refers to para 5a)

Return on Assets

of

Stan Sound’s and Cen Tex Audio Center

S.No Year Net Net Assets Return on Remarks

Earnings ( in US $) assets
( in US $) (b) ratio
(a) (c = a/b)
a. 1972 -1206 53445 -0.042 a). Net Asset for
year 1977 other
than individual
store inventory has
b. 1973 8204 72698 0.11
been divided in 7/3
ratio among Stan
Sound and Cen
c. 1974 15788 83418 0.189 -Tex Audio Center.

b). Reasoning
d. 1975 14291 102777 0.139 behind said action
is that Cen Tex
Audio is located in
an affluent area,
e. 1976 28607 102209 0.279 hence cost of
establishing to
include rental etc
will be more.
f. 1977

(i) For Stan 22816 89908.2 0.253

sound’s

(ii) For 2262 37730.8 0.059

Cent ex
Audio
Exhibit III

( Refers to para 5c )
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 Long term liabilities

of

Stan Sound’s and Cen Tex Audio Center

Year 1972 1973 1974 1975 1976 1977

Long term 22000 19800 27820 25198 22678 20410

Liabilities
( in US $)

Difference -- - 2200 8020 - 5398 - 2520 - 2268

from previous
year
( in US $)

Exhibit IV

( Refers to para 7a )

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 % YOY Change in Earnings

S.No Year Net Percentag Gross Percentag Net Percentag

sales e change Margin e change Earnings e change
(in US$) from (in from (in US$) from
previous US$) previous previous
year year year

a 1972 25062 6566 -1206

b 1973 208052 7.3015 64496 8.8227 8204 -7.8027

c 1974 288058 0.3845 93619 0.4515 15788 0.9244

d 1975 340270 0.1813 102081 0.0904 14291 -0.0948
e 1976 394983 0.1608 130034 0.2738 28607 1.0017
f 1977 381229 -0.0348 120087 -0.0765 25078 -0.1234

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