Comp Tech Ltd is a small company that intends to start operating in London. The main vision of the company is capturing a wide market niche by selling computers and software. After a thorough feasibility study of the London market, the financial officers were able to identify that the majority of firms in London did not high quality laptops and genuine software. Their research identified that many firms dealt with laptops and desktops from Lenovo, HP, Sony, Samsung and Apple. Considering that Comp Tech Ltd products will be high quality and reliable, the company intends to sell computers particularly in the entire London market. Prior to incorporation of the company, it obtained the necessary licenses and certifications in order to be allowed to manufacture and sell computers and software in London.
Computer prices seem inflated in the London market since prices of many laptops range from £565 – £1500. In comparison with other markets in other countries, this price can be considered exorbitant considering that the computers offered are not high quality. Therefore, Comp Tech Ltd will strategically place itself in the market and sell laptops at a cheaper price compared to other firms. In addition, the supply for software is less, and demand in the market always exceeds the supply. This creates excess demand which results to high prices. Comp Tech Ltd has already signed contracts with Dell and Microsoft companies to obtain the products from the headquarters at a lower price. Thus, Comp Tech Ltd will be able to achieve its objective of capturing a large market niche.
Given that the majority of the laptops selling price range from £565 – £1500, Comp Tech Ltd endeavors to come up with laptops that will be cheap to consumers and at the same time efficient. The company intends to sell the laptops at approximately £250 – £600. The price range will be extremely attractive, and consumers will think twice before purchasing laptops from other firms. Given that an increase in computers will yield to an increase in the demand for software, the company will sell the software at approximately £20- £100 compared to the market prices which average £50 – £150. Comp Tech Ltd carried an investigation and identified that a large population is currently purchasing computers due to the increase in technology. It is worth mentioning that it is easy to think that Comp Tech Ltd will incur huge losses due to the low prices; however, the company has established reliable suppliers who will supply the company with cheap raw materials.
Explanation of the break even analysis
For the company to breakeven, it must produce 1980 laptops and it monetary value, Comp Tech will breakeven at the point when the sales are £ 891089 in value. On the other hand, for the company to breakeven when selling the software, it needs to produce 4,878 operating systems. In pounds, the company will breakeven when the sales of the operating systems have value of £731,700.
Underlying Assumptions
The main assumption while investigating the breakeven is that the fixed cost of the company will be £ 200,000. This assumption helps us identify how many laptops will require to be sold that the company can break even and the number of software that the company requires to produce so as to break even. It is evident that for the company to break even, it needs to produce 1,980 laptops and 4,878 operating systems. It is worth noting that the production of one operating system symbolizes the production of all the software produced by the company.
Net Present Value method of discounting the cash flows from the marginal costing principles
Underlying Assumptions
The initial outlay of the company is 1,000,000 and the working capital over the five years is 200,000. The discount rate used in the calculation is assumed to be 10 percent. The discount rate was arrived at by comparing the cost of capital used by the majority of the companies in the industry. In addition, the existing tax rate for companies in London is 35 percent. The tax rate was used to get the after tax cash flows. The method of depreciation used by the company is the straight line hence the constant depreciation of 200,000 throughout the five year appraisal period.
Conclusion regarding the business investment
Identify and discuss one issue that your business could undertake to improve environmental sustainability using suitable measures to aid your discussion
One obstacle facing Comp Tech Ltd is the availability of credible suppliers who will be reliable and willing to advance the company credit. Comp tech Ltd should conduct a survey of the available suppliers of raw materials and then approach them. At this point, it is advisable for the company to explain its vision and convince any of the reliable suppliers that they can enter into a long term contract with Comp Tech Ltd.
The company can merge with other firms that supply raw materials so as to control the source of raw materials. Controlling the source of material enables a firm to have a competitive advantage over other firms and able to produce using less production cost. Mergers results to synergetic effects that result to increased efficiency as well as growth. Therefore, Comp Tech Ltd should consider a merger with one of the suppliers such as Albion Computer Services.
Another strategy that Comp Tech Ltd can take is that of advertising. Since the company is new, and it is targeting new customers, it is appropriate for the company to start intensive advertisement so as to make their products known as well as informing consumers. Advertising is considered one of the fastest and cheapest means of reaching a large clientele. Therefore, Comp Tech should consider advertising as a strategy of increasing environmental strategy.
Another strategy that could increase the environment strategy is opening divisions in various part of London. This move will be strategic and will enable customers get Comp Tech products easily other than having to travel far in order to purchase. In addition to opening divisions, it is advisable for the company to open websites where customers can purchase laptops and software online. This will increase the popularity of Comp Tech products and, as a result, able to capture a wide market niche.
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