Week 5_ Agbato Oluwabusayo_ Choosing the most economic business plan _Week 16 _SeeGod Meregini

Problem Recognition/Evaluation

In my company, I support business development department. Sometimes proposals are sent to my team for verification and evaluation.

Recently, I was made to lead a small team in analysing a small scale business opportunity.

Interestingly, the business is expected to be utilised for only one year as it would be a test piloted one.

I was faced with the problem of correctly evaluating which business proposal should be chosen.

Development of Feasible Alternatives/Solutions

After the evaluation of the risks involved in the proposal, three (3) feasible business ventures is used based on total life-cycle costs.

Alternative 1- Rental of Personnel services as support to other company needs

This involves receiving positive cash flows or cash inflows for the service of personnel measured in standard service hour.

Alternative 2 – Rental of Housing equipment hours for support of household needs

This involves the obtaining monetary receipts for hours of service loaned out because of equipment usage.

Alternative 3-Rental of Telecomm services

This involves a flow of money such that monetary receipts are gotten for hourly usage of telecomm.

Probable Outcomes of Alternatives / Solutions.

In carrying out this analysis, an assumption is that comparison is done over one year.

I used a type of analysis called present economy studies hence the time value of money is not a factor.

A number of meetings were held with various key financial players already in the respective business divisions. Other external stakeholders were also consulted including some regulatory bodies.

Factored costs are used in this analysis but have same equivalence with original for the purpose of showing the final result.

Alternative 1 Rental of Personnel services as support to other company needs

This alternative has fixed cost calculated to be $170,000 per month and a variable cost of $72 per standard service hour. The charge out rate (selling price) is $105.25 per hour.

Alternative 2 Rental of Housing equipment hours for support of household needs

Here the fixed cost is about $153,000 per month with a variable cost of $80 per hour. The charge out rate (selling price) is $105.25 per hour.

Alternative 3 – Rental of Telecomm services

This alternative has fixed cost calculated to be $170,000 per month and a variable cost of $80 per hour. The charge out rate (selling price) is $115.78 per hour.

Selection Criteria in determining the solution

1. The business venture should have a lower breakeven point so that profit can be earned earlier.

2. The venture should have a capability of earning the maximum profit.

Analysis and Comparison of the alternatives

Another assumption is that no service hour is rejected.

Also, in this analysis, an assumption is that Price is independent of Demand and is greater than the Variable cost per unit (c_v). This would result in a single breakeven point.

Also, under the assumption that demand is immediately met, the following conditions are necessary for a profit to occur:

· Total Revenue (TR) must exceed Total Cost (C_T) for the period involved

· Price per hour must exceed variable costs (C_v).

The formulas below were used in determining the breakeven point (D’), Total Revenue (TR) and Total Cost (C_T).

TR = D * P....................................................................................................Equation 1

C_T = (C_v * D) + C_F........................................................................................Equation 2

TR = C_T

[P*D’ = C_F + C_v*D’} breakeven point...........................................................Equation 3

Where:

C_v = variable cost per hour

C_F = Fixed cost

P = selling price per hour

D’ = Breakeven point (TR= C_T)

D = demand

TR = Total Revenue

C_T = Total Cost

Quantitative analysis of the alternatives

Using Equations 1, 2 and 3;

Total Revenue = Total cost (breakeven point)

P*D’ = C_F + C_v*D’

D’ = _______ C_F _______

(P - C_v)

Alternative 1

D’ (breakeven point) = $170,000

$105.25 - $72

= 5,113 hours per month

Alternative 2

D’ (breakeven point) = $153,000

$105.25 - $80

= 6,059 hours per month

Alternative 3

D’ (breakeven point) = $170,000

$115.78 - $80

= 4,751 hours per month

Selection of Preferred Alternative

Based on the above quantitative analysis and criteria, I recommend ALTERNATIVE 3 because of the following reasons:

· Alternative 3 has the lowest amount of hours needed to reach the breakeven point. This means that any further increase in hours (demand) will result in a profit for the company.

· Of the three alternatives, selecting Alternative 3 would reduce the likelihood that a loss will occur during market fluctuations.

· Also if the selling price remains constant or increases, a larger profit will be achieved at any level of operation above the breakeven point.

Performance Monitoring/Post Evaluation

This would be monitored by constantly evaluating

· How the single breakeven point would be affected by changes in fixed costs and variable costs due to market fluctuations.

· How the single breakeven point would be affected by changes in selling price due to market fluctuations

· How the effect of other risks and uncertainties affects the profit.

References

Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2009). Cost Concepts and Design Economics. In M.J. Horton (Ed.), Engineering economy (15^th ed.) (chapter 2) (pp. 20 - 25). New Jersey, NJ: Pearson Education, Inc.

Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2009). Engineering Economy and the Design Process. In M.J. Horton (Ed.), Engineering economy (15^th ed.) (chapter 1.3) (pp 7). New Jersey, NJ: Pearson Education, Inc.

United States Government Accountability Office (2009, March). Cost Risk and Uncertainty. GAO Cost Estimating and Assessment Guide. Best Practices for Developing and Managing Capital Program Costs. (chapter 14) (pp.160).Washington, DC: GAO.

AACE International Education Board. (2006). Risk Management. In J.K.Hollmann (Ed), Total cost management framework – A process for applying the Skills & knowledge of cost engineering (1st ed) (chapter 7.6.1) (pp.159-160). Morgantown, West Virginia: AACE International.