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Assignment - 2

Stan’s Sound / Cen –Tex Audio Center


Business Expansion outside Westville

A Report
Submitted to

Prof Mukul Vasavada

In Partial Fulfillment of the requirements of the Course

On
10th October 2010

By
Aditya Kumar

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Stan’s Sounds / Cen – Tex Audio(SS/CTA)
Westville, Texas

To: Mr. Stan Kramer


From: Aditya Kumar

Subject: Report based on analysis of the offer received to open a new retail outlet in
Wardlow.

The management of SS/CTA must be congratulated for their efforts to make a name of their own in just
six years. This report gives an analytical insight on the invitation to open a Stan’s Sounds / Cen – Tex
Audio (SS/CTA) retail outlet in Wardlow.

I hope this report will help SS/CTA management to make an appropriate decision.

Kindly revert back for any further clarifications.

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Executive Summary:

SS/CTA has been invited to open an outlet in Wardlow. Wardlow is 140 miles from Westville of a small
population of just 185,000 people. The city has shown a preference for music equipment and thus the
demand to open new retail outlet has come by.

The first and foremost consideration will be the distance. buying population is also almost 78% less
than Westville.

The offer is analyzed considering SS/CTA track record from 1972 to 1977. Liquidity in hand,
efficiency over the years, Return of Investment (ROI) have been computed and looked upon.

As per the analysis, it is recommended not to open any outlet at this point of time as the business in
Westville requires more attention, ROI of Wardlow is expected to be low, low liquidity in hand.
Additional investors are also not recommended due to already large accounts payable.

Word Count: 141

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Table of Contents

S. No. Contents Page No.


1 Situation Analysis 5
2 Problem statement 6
3 Criteria for Evaluation 6
4 Options 6
5 Evaluation 7
6 Conclusion 8
7 Recommendation 8
8 Action Plan 8
9 Reference 9
10 Exhibits 10

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Situation Analysis:

Since the inception of Stan’s Sounds in 1972, the company has grown steadily. This has been largely
due to the vision of Mr. Stan Kramer of owning a retail chain. He along with Mr. Robert Porter has
worked on a progressive strategy of expansion, which led to rise in assets from $ 53,445 in 1972 to $
127,639*.

The analysis shows the Current Ratio (CR)** has been well over 2:1 and sustained well but the Quick
Ratio (QR)** is mostly below 1.

Comparing both the ratios it is noted that a substantial liquidity is stuck in Inventory, while the current
liquidity on hand is at the lowest due to recent investment in Cen – Tex Audio. As far as Return of
Investment (ROI)** is concerned, it has shown a up and down pattern. But mostly ROI and Working
Capital (WC)** is maintained well, last year ROI being 46.4%. This may help us win some creditors to
invest in Wardlow.

The Earning Statements** also shows that there has been a steady rise in Net Earnings and overall
SS/CTA has been better off. There is no doubt that SS/CTA has been managed well barring their
inventory turnover, which says that inventory managed is much less than demanded.

The distance between Westville and Wardlow is not a matter to ponder as transportation cost will be
bore by the suppliers themselves. 15% less lease rent offered will be more or less adjusted for any extra
travelling cost associated.

The analysis gives a fair idea as SS/CTA can opt for another new store provided they have enough
liquidity in terms of more investments in owner’s equity or creditors. But now the main concern is
whether SS/CTA will get enough market in Wardlow which is 78% less populated than Westville.

Taking Wardlow’s Buying Power Index (BPI) of 0.1918 in account, I am sure CTA store will be non-
profitable, while SS might just breakeven.

*- Exhibit 1, **- Exhibit 2

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Problem Statement:

After a creditable investment in CTA just six months ago, offer to open a new retail store in Wardlow
has come by a Mall developer. Should the SS/CTA opt to open the proposed store 140 miles away?

Current liquidity is low and CTA is also not established. It’s still in the initial stages, which requires
total supervision of Mr. Kramer and Mr. Porter’s time is also full. CTA is a customized outlet and has
great potential due to rapidly developing market of Westville.

A new store will require any 1 of the owners to relocate for some time at least which will affect the
business here as total dependency on Mr. Willobend is not yet proved.

Criteria for Evaluation:

1. Liquidity Ratios**(CR, QR & WC)


2. ROI**
3. Inventory Turnover**
4. Profit Ratio**

Options:

1. Accept the offer.


2. Focus on current business.

**- Exhibit 2

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Evaluation:

1. Liquidity Ratios: These ratios indicate the ease of turning assets into cash. SS/CTA has been
satisfactorily doing this as we can make out from the CR, QR and WC.

a) Current Ratio:- CR ratio has always been maintained above 2, but there has been a sharp
decline from 1975 to 1976. This is due to investment in Cen-Tex store and so the
liquidity now available is low.

b) Quick Ratio:- Also referred as Acid Test for any business as it does not include
Inventory in calculation and thus gives Liquidity in hand which is fairly certain. As we
can see in ratio table** that current liquidity is quite low. This will hamper SS/CTA’s
idea of immediate expansion.

c) Working Capital: Bankers look at Net Working Capital over time to determine a
company's ability to weather financial crises. Loans are often tied to minimum working
capital requirements. SS/CTA has managed well and the cash flow has been just enough.

2. Return Of Investment: Leaving 1972, the ROI has been very healthy barring dip in 1975. This
was the effect of new shop opened at the end of 1974. More investment and less starting sales
showed the dip. But it has come back on track with last being 46.4% last year. This will
encourage new investors. But surety of same ROI from a city of only 185,000 people and
0.1918 BPI is not there.
3. Inventory Turnover: SS/CTA is showing a low inventory turnover. This is largely due to
disorganized inventory handling system prevailing. It needs improvement; the system has not
backfired yet due to all the experience used by Mr. Kramer and Mr. Porter. I only mean to say
they are needed to stay in Westville especially when CTA has not been established yet. A new
outlet will only divert attention and will affect current business.

**- Exhibit 2

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4. Profit Ratio: This ratio focuses on the net profit margin arising before taxes have been deducted.
In short it measures the efficiency. Average ratio of SS/CTA is on rise. This will also attract
more investors.

Conclusion:

1. Not enough liquidity available to invest.


2. ROI of Wardlow is not expected very profitable on the onset (low population).
3. Business in Westville is sustained but needs improvement in basic planning and control.
Especially inventory handling system.
4. Owners are not free to concentrate on business 140 miles away as Cent Tex Audio is also in line
to be established. A creditable recruitment is also not guaranteed. It will also reduce profits
further.

Recommendation:

SS/CTA should not accept this offer due to sheer lack of liquidity and increased accounts payable**,
lack of dependable expertise for Wardlow, and current business requirements of Cen – Tex Audio.
It’s proposed to improve inventory handling with introduction of a warehouse. This will strengthen the
market position of SS/CTA.

Action Plan:
1. Improve Inventory handling system to tap the remaining potential of Westville market. A
warehouse will help in the long run. Capacity can be decided by the owners.
2. Invite more investors to maintain healthy inventory in line with demand.

Word Count -986

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References

 Accounting – Text and Cases, 12th Edition, by Anthony, Hawkins, Merchant. Tata Mc Graw Hill
Publications.
 www.investopedia.com
 www.wikipedia.com
 www.netmba.com
 www.accountingcoach.com

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EXHIBITS
Exhibit – 1 – SS/CTA Balance Sheet and Comparative Earning statements from 1972 to 1977

1972 1973 1974 1975 1976 1977


Recievables 0 2437 3222 3880 4290 5102
Inventory:
Stans
Sounds 24060 45078 60012 72885 69122 66923
Cent Tex
Audio 0 0 0 0 0 27880
Other Current
Assets 24752 20071 9553 15235 15895 8992
Fixed Assets 4634 5112 10632 10777 12902 18742
10277 10220 12763
Total Assets 53445 72698 83418 7 9 9
Accounts Payable 10323 31480 33937 21977 23750 48996
Other Current
Liabilities 1122 1418 1662 1602 1781 4233
Long Term
Liabilities 22000 19800 27820 25198 22678 20410
Stock Holder's
Equity:
Paid in Capital 20000 20000 20000 54000 54000 54000
10277 10220 12763
Total Liabilities 53445 72698 83418 7 9 9

1972 1973 1974 1975 1976 1977


Net Sales
Stans 20805 28805 34027 39498 38122
Sounds 25062 2 8 0 3 9
Cent Tex
Audio 0 0 0 0 0 72489
Cost of goods Sold
Stans 14355 19443 23818 26494 26114
Sounds 18496 6 9 9 9 2
Cent Tex
Audio 0 0 0 0 0 53642
Gross Margin
Stans 10208 13003 12008
Sounds 6566 64496 93619 1 4 7
Cent Tex
Audio 0 0 0 0 0 18847
Expenses
Stans 7772 56292 77831 87790 10142 97271
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Sounds 7
Cent Tex
Audio 0 0 0 0 0 16585
Net earnings
Stans
Sounds -1206 8204 15788 14291 28607 22816
Cent Tex
Audio 0 0 0 0 0 2262

Exhibit – 2 Performance Analysis from 1972 to 1976

Inventory Current Quick Profit Working


Year ROI (%)
Turnover Ratio Ratio Ratio (%) Capital
4.264919 - 37367
179 2.16269113 4.81206607
1972 -6.03 -- 1 6
4.1527380 2.054410 3.94324495 34688
1973 41.02 02 602 0.68417533 8
3.7004282 2.044636 0.35885839 5.48084066 37188
1974 78.94 04 085 5 4
26.464814 3.5845654 3.901777 0.81067899 4.19990007 68421
1975 8 91 005 4 9
52.975925 3.7314921 3.497982 0.79060749 7.24259018 63776
1976 9 1 844 7 7
46.440740 3.8390532 2.045820 0.26478047 6.57819840 55668
1977 7 54 887 7 6

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