Opinion Paper on Expanding a Business to Make a Profit

A detailed Summary of Opinion Paper on Expanding a Business to Make a Profit

All commercial organizations exist for the purpose of making money, and opinions to launch a product have to be made on the possibility of the product being profitable or not. There are many methods of analyzing the problem. The simplest method based on the facts given in the case is to find out the expected gains made on each tire, and then finding out the number of tires that the company must sell to make a profit. Then one will have to view the possibility of the number being sold or not.

Let us first look at the costs. Of them, research and development costs have been given as $10 million. This is a developmental cost and has to be viewed as a sunk cost. This means that the decision to incur research and development is a corporate decision and cannot be linked to any product. Another cost has been incurred on marketing, and that is of $5 million. This has been incurred by the brand. The other cost is of $120 million for production equipment. This is directly linked to the brand. Thus the first objective will be to recover $120 million directly incurred on the brand and the second objective or goal in relation to this will be to recover $35 million which are incurred in total terms with regard to the brand. It would be only a

fter that the profits would tend to arrive. All of this needs to be done within a duration of 4 years which is considered to be the expected life time period of the brand. In order to recover this, one needs to next understand the contribution which is expected from each of the tires.

Now let us look at the other market of replacement tires. Here the sales price is $59 per tire and the direct costs are still $18 per tire. Thus the total overall contribution is at the rate of about $41 per tire. From this amount an amount of 15.9 per cent discount is being made and after that the contribution in terms of each tire is considered to be as $34.48 per tire. In order to bring about a recover in terms of marketing and expenditure relating to general administration, it would need a sale worth of 0.73 million tires in annual records as this is because each tire is contributing to an amount of $34.48. The next question to be discussed is that of covering an amount of $120 million which is being spent on that of facilities relating to production and this would require a sale worth of about 3.48 million tires. The other item which is left to cover is that of capital expenditure worth $15 million and for this there need to have a sale of about 0.44 million tires. Thus while taking into consideration of the entire full period of four years during which the brand would tend to be active, there needs to be a sale of about 6.84 million tires. This is however against the required sale which is of 15.52 million tires for the other kind of sale to that of the OEM. Both these calculations have ignored the increase in price by 1 percent a year and the impact of depreciation which is increased by 3.25 percent a year. Those will only bring about a change in the total amount of figures, but the ratios however will not change too much. The important question which is to be discussed here is to judge the level of possibility in relation to meeting these targets, as Goodweek Tires will be only entering into a loss making proposition otherwise. The general trends with regard to these figures are considered to be accurate as the sale to be held to

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Approximate Word count = 1440
Approximate Pages = 6 (250 words per page double spaced)

Category: Miscellaneous