Full Name.

: Varsha Shukla

Admission No. : 18190474

Enrolment No. : 180010101002

Programme Name. : PGD – Accounts and Finance

Section. : A

Subject Code & Title. : ECO- 7748

MANAGERIAL ECONOMICS

Teacher’s Name. : Mr. Rajneesh Kler

INTRODUCTION
An accessory store owner in China’s is uncertain whether it turned out to be a wise decision
to begin his own company. The owner has identified that the shop may faces loses if it
continue to operate in existing condition.The owner should come up along with a remedy.
Given the unsatisfactory financial performance of Maple Tree Accessory Shop (the Business)
in terms of maximising revenue and managing costs, Ivan Ho has to come up with an immediate
strategy to optimise his personal profit and long-term return.

OBSERVATIONS
The following observations can be drawn from the case study as-
 the Business is highly accessible to the target market
 its unique interior design appeals to consumers and the product being offered has
always been a part of the local culture.
 the price of the products is significantly higher than that of other accessory shops in
the surrounding area.
 the lack of advertisement and differentiation most likely contributes to the low level
of sales
 Ivan Ho has to manage and allocate his time to different priorities (i.e. the Business,
his family and his full-time work as a manager) also it is the first time of the Proprietor
to manage his own business.

Let us answer the following questions asked in the case study-

1) Should Ho have accepted his friend’s free design offer?

The initial step was to discover a shop-fitting architect. The place had to be transformed
from a restaurant to an accessory shop. However, before starting a shop he needs a
designer to design a shop ,one day when he was attempting to search for a design company
on the Internet, his PDA range. It was his friend Bin calling. He asks him do you have
time to go mountain biking this weekend? But he replies that he doesn't have a chance to
go because I'm planning to open a shop. There is a lot of work to do. I'm afraid I cannot
make it this weekend, and I'm looking for a designer for shop fitting. Then Bin replied
that he would do it for him and that his designs would be free. A gift to your new shop.
Ho knew that it could cost him RMB4,000 if he hired out the work. So it is the great
opportunity for HO, but June to October was a high season for interior decoration, which
made Bin extremely occupied. Ten days passed and Ho was all the while expecting the
plan. Additional 10 days went and there was not one part of an outline coming in. As the
administration was for nothing, Ho viewed it as improper to push Bin. At the point when
15th July came, Bin sent a duplicate of an attracting to Ho. Finally, the development
started, which went on for a month and cost RMB25, 000. So that is not a good opportunity
for HO because if it could cost him RMB4, 000 if he hired out the work.
 2) If the shop continues as is, what will be the profit/loss after two years of operation? (
Assumes that there are 720 business days, each year the shop will be open for 360 days)

Estimated Monthly Income (Loss) of the Business

(in RMB)
Sales 18,000
Cost of sales _(9,000)_
Gross profit 9,000
Operating expenses (excluding depreciation):
Rent 3,300
Salaries 2,400
Commission (3% of sales) 540
Utilities (water) _ 150__
Total operating expenses _6,390_
Monthly operating income 2,610

*estimated annual income therefore is RMB 31,320

Sunk costs (also represents the initial investment):

Sublet fee 58,000

Shop fitting 25,000

Cash register 500

Total sunk costs 83,500

Estimated current annual ROI

ROI = Yearly income / Initial Investment

ROI = 31,320 / 83,500 = 37.51%

Estimated monthly income if Ho reverts to his online work

Fee per hour RMB 200

Estimated number of online work hours per month x 50 hrs._

Estimated monthly income from online work RMB 10,000
 It is expected that after two years of business he will earn a profit of 62640 after paying
his all expenses like Ho paid a fixed salary of RMB2,000 per month to Flower Chan, the
full-time employee, plus three per cent of sales revenue as commission. For the part-time
employees, he hired two students from the university and paid them RMB10 per hour plus
three per cent of sales revenue as commission. The first month’s bill for water and
electricity is about 150, and the rent of the shop is about 3300. However ,it is also
expected that when he starts the business, he will bear the loss in his first month of
business, and it is anticipated that after a year he will earn a profit of 31,320.

3) Should Ho accept Chan’s suggestion to cut prices by 20 per cent?

It is expected that Ho should cut the prices in order to capture the market as also other
shops are also selling the same kind of accessories, he can also give some
complementary pamphlets for further promotion of his shop. He should respond to the
market by studying consumer trends and modifying pricing of the goods.Initially by
offering great customer service in near future he can increase the prices.

4) To break even, what daily revenue should be achieved on average in two years of
operation? (Use the assumption of Question 2.)
Breakeven
It is expected that after two years of business Ho would have a no-profit-no-loss
situation and such a situation is typically known as “Break-Even point.” This happens
when the Gross Profit that you earn from a business is exactly equal to the Fixed
Expenses of the firm. The calculations are based on the assumption that the change in
the expenses of the shop is related to the change in revenues.

5) Would it be a wise choice for Ho to shut the shop down in the short run?

It is expected that Ho should continue the shop in the short term because he has many
expenses to pay and fix cost to pay therefore if he is going to close his shop for the short
run then he will be bearing a loss which is not good for him or his business. For the high
growth and high profit, he has to continue his shop for the short run. The objective of the
firm is to maximise benefits by minimising misfortunes. The company would encounter
higher misfortune if it continues to create merchandise if it stops production for a period
of time. Income would not take care of the variable costs connected with the production.
Rather, amid a shutdown the firm is just paying the settled expenses.

6) Would it be a wise choice for Ho to resume his part-time job as a software engineer,
rather than operate the business?

As per as the calculation, it is expected that Ho will earn more profit in part time job
rather than he has his own business as it is expected that after two years he will make
62640 from his own business after paying all his expenses. Moreover after two years he
will make 144000 from his part time job which is more than his business.
 7) Do you have any Suggestions for Ho that would help him successful in his business.

It is perfectly normal for a start-up business to experience financial and operational challenges
at the onset, especially if it is also the first business venture. Managing a business will always
require strenuous time management and compromise of other priorities. Although heavy
competition is a big threat to the current business, it is not the primary problem. The reason
why the business is losing to competition is because of poor management of costs and a
mismatch between the immediate market and the market strategy imposed by him.

Hence, what is needed as of the moment is an overhaul of how the business operates and
possibly a partnership with people who are already experienced. The following are the
proposed actions under this recommendation:

1. Consultation with professionals who are experts in the field of starting a small start-up
2. Search for a business partner who share the same business goals as the proprietor but
manifests more experience in managing a start-up
3. Respond to the market by studying consumer trends and modifying pricing, this can be
done through
1. Lowering prices by 20%
2. Giving of discounts and promos for bulk purchases
4. Sell products other than accessories (such as food and snacks) for additional income
5. Increase marketing efforts to establish his brand and to improve competitive advantage
6. Modify the incentive package of the employees through lowering fixed salaries and
increasing commission to encourage higher sales
7. Save on water and electricity
8. Search for a supplier or a group of suppliers that are closer to the location of the
business. This also includes streamlining inventory procurement and delivery through
entering into a contract with the suppliers.