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ib business management hl notes
IB BUSINESS MANAGEMENT HL

Should Business X Purchase A New Fridge More Storage Space?

UPDATED ON - 26 MAY 2020
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Contents:

INTRODUCTION

1.1 Research Question:

“Should business X purchase a new fridge?”

1.2 Aim:

The aim of this report is to analyze whether the business should buy a new fridge or not. Furthermore, the report will also provide an analysis of alternative options that the business may consider if it chooses to buy a new fridge. The aims, objectives and subsequent questions of this report have been set to give the report focus and direction. These can be found in the appendix.

1.3 Choice of Business Techniques

A suitable business technique that can be applied to this report is the SWOT Analysis, an examination that defines the business’s current position. This will determine the business’s health and also, the factors surrounding the project i.e. strengths and weaknesses. This report will also look at the Sources of Finance available to the business. I will also conduct a Cost-Benefit Analysis of the available project alternatives.

*Note: The business that I am studying is a restaurant located in Australia, Queensland; the background of the business can be found in the appendix.

2.0 Research

2.1 Reasons why Project is being undertaken

Although the fridge will not help Business X increase revenue or decrease costs, the fridges’ will provide the business with the opportunity for expansion. They currently have a need for another fridge because they need more storage space for perishable goods. E.g. raw meat.

2.2 Product Choices and Alternatives

*Note: Descriptions of Options are found in the appendix.

Table 1

 

Options and Alternatives

Option A

Option B

Option C

purchase cost

$2563.00

$3029.00

$3729.00

Size

1.5 m x 0.7 m x
0.85 m

1.5 m x 0.7 m x
0.85 m

2.3 m x 0.8 m x
1.1 m

Structure

Four Doors

Six Doors

Three Doors

Effective Volume

300

300

Not given but
approx. 700

Weight

90 kg

90 kg

200 kg

Shelf Quantity

2 off

2 off

3 off

Temperature
Range

0-10oC

0-10oC

0-10oC

Refrigerant

R134a

R134a

R134a

Max Ambient

40oC

40oC

40oC

Warranty

2 Years

2 Years

2 Years

Product Quality

Stainless Steel

Stainless Steel

Stainless Steel

 

*Note: Internal and External requirements are found in the appendix.

2.3 Costs of Project

        2.3.1 Initial Costs
This report has purposely chosen to analyze three products that come from the same Seller. This will enable the report to only focus on analyzing the factors regarding the actual product and not other factors such as different transport and delivery costs. The only variable cost is the initial payment for the actual products. (Purchase costs outlined in table 1)

*Note: The hidden costs have been outlined and can be found within the appendix

2.4 Sources of Finances for the Project

Although the business currently wants to make this purchase, it, unfortunately, does not know where the finance will be coming from. An internal source of finance that the business may want to consider is retained profit. Because information regarding the business’s value of retained profit cannot be attained, this report can only consider the external sources of finance available to the business. Sources of external finance are Bank Overdrafts (BO), Hire Purchases (HP, Leases and Bank Loans (BL). (Module 4.4) There are also different procurement alternatives available and these can be found in the appendix.

*Note: Definitions of sources of finance found within, Business Studies – Third Edition.

3.0 Data Analysis & Discussion

3.1 SWOT Analysis of undertaking Project

Table 2

STRENGTHS WEAKNESSES

• More storage space for

perishable goods.
• Employee satisfaction – stock will

be distributed more evenly,
employees won't need to go in

Search for goods deep inside the
existing fridge.
• Order in more stock
• Will be able to use the fridge as a workbench

• Opportunity cost – the business
could use the money elsewhere.
E.g. new equipment
• Will add to the daily running costs
of the business. i.e. electricity
bills.
• May change the way the business
operates
• There are Hidden Costs
associated with the project.
OPPORTUNITIES THREATS
• Store more stock on site,
potential to sell more meals.
• Purchase additional types of
stock
• The product creates more costs than
intended, (hidden costs)
• There will be changes in the way
inventory is managed; change
could cause disruptions to the
business.
• Means more things will be stored,
thus foods that do not get sold
are to be destroyed if the expiry date
is reached.

 

3.2 Analysis of Sources of Finance

The sources of finance that the business fundamentally has access to are external sources. However, the products that are being analyzed can only be purchased through a direct payment. Thus, sources of finance such as HP and Leases are eliminated, leaving only sources like Bank Loans and Bank Overdrafts. Bank loans normally would not be given to businesses that are making small purchases such as a fridge. But the Bank Loan would be sufficient enough to fund the purchase. However, the business may choose to obtain a Bank Loan to fund this investment and to also use the excess finance to fund other areas within the business. ABO is also not very viable because it may not be sufficient enough to make the purchase, as the business may not produce enough funds in that period to pay off the overdraft. (Module 4.4)

4.0 CONCLUSION AND RECOMMENDATIONS

        4.1 Summary

Through the purchase of a new fridge, Business X can consequently increase their storage capacities. Financially, after the purchase of the fridge, the business obviously gains storage space, which means the business can sell more; which leads to an increase in sales. Internally, the fridge will increase employee satisfaction. The general opinion of the business’s employees regarding this purchase was positive, “I think the new fridge will help us because we won’t have to go searching for foods at the bottom of the other fridges.” The owner of the business also agrees with the purchase, feeling confident that it will enable efficiency in the way operations are carried out.

 

Although there are disadvantages associated with the purchase of a new fridge, seen through the SWOT, such as costs, the strengths do outweigh these factors; an example increases in storage capacity vs. running costs.

 

Business X currently has 7 fridges/freezers. This may be a threat because the business stores and sells foods which have an expiry date, the risk of becoming reliant on storing food is evident. i.e. foods that are left in storage that do not get sold, eventually meet their expiry date. If the business stores too much, then it risks making a loss from its investment in the fridge.

 

The sources of finance available to Business X can be seen to be limited. As outlined, internal sources of the business such as retained profit cannot be evaluated due to lack of data. Thus external sources of finance are the only sources that can be examined in this report. The business has access to external sources such as Loans, Overdrafts, Hire Purchases and Leases. However, these sources can only be accessed to certain degrees. Such an example is a Loan that has been discussed.

 

The cost-benefit analysis (appendix 8) has outlined key strengths and weaknesses in each of the options. The two options that can be considered to be the most viable is Option A and C. Option B are not seen to be viable simply because Option A is more viable then it. Because Option A and B are so similar, with only one difference, it is simple to evaluate which option is better. In this case, Option B is more expensive due to the reason that it has 6 doors, compared to option A with only 4 doors. However, for a restaurant, having more doors is not necessarily better. Restaurants operate at a hectic level; which means they need to work fast and efficiently. The disadvantage of having so many doors is that this will slow down the process. The reason why option B is not a viable solution is that it is more expensive for having too many draws. Options A and C can be difficult to evaluate. The reason why is that each option can be based on the business’s objectives. If the business just needs an additional fridge or extra storage space then option A is ideal. However, if the business plans to make a major expansion, then it should select option C due to its larger size and lower costs when placed into a ratio with option A.

4.2 Recommendations

It is recommended to Business X that they can indeed make the purchase of a new fridge. From the three options provided, it is recommended that the business choose to buy Option C at this point in time. Business X should fund this investment by obtaining a Bank Loan.

 

However, it is greatly discouraged by the business to make the purchase based on the provided data. As outlined, there are various factors that have not been taken into account; the sources of internal finance are a significant factor. With the knowledge of the available internal finances, the business can determine if whether it needs to obtain external sources. It is also highly recommended that the business look at a broader range of products.

5.0 FUTURE ACTIONS

        5.1 Acknowledgement of Lack of Information

This report acknowledges that it has a lack of primary information. The reason for this is that the sponsor had not been available for some duration. However, there are several points that should be followed up if this report wishes to deeply examine the research question.

 

    •     How much money is set aside for the purchase

    •     The sales records of the business – so that it can be decided whether the business has enough internal sources of finance; if not then an external source of finance has to be determined
    •     Delve into the opinions of all of the business’s immediate stakeholders, as for this report has only questioned a few employees being that only the owner is involved in the decision making.

6.0 APPENDICES

6.1 Appendix 1 Subsequent Questions:

    •     What are the costs associated with the purchase and use of this product?
    •     What are the reasons for purchasing this product?
    •     What are the factors surrounding the purchase of this product?
    •     What are the sources of finance?
    •     Are there any alternative options?

6.2 Appendix 2 Objectives:                    

                    6.2.1 Business objectives:

    •     To provide the business with 3 alternatives that they can choose between.
    •     Factors that the business should take into account to help them solve the problem of buying a new fridge.                    

                    6.2.2 Personal Objectives:

    •     To provide useful information for my sponsor
    •     To use my business knowledge in a real-world situation

                    6.2.3 Achievement of Objectives

The objectives of this report can be said to have been met as that it has provided; 3 alternatives for the business, factors surrounding the project, provided information to the sponsor and that my business knowledge has been used in a real-world situation.

6.3 Appendix 3 Business Background:

Business X is a relatively medium-small sole-trader Asian Restaurant that operates within a reasonably competitive market since 1997; consisting of 8-12 employees. The central operation of the business is to produce foods under the pull system, whereby the produced goods are based upon the customer orders. The business operates on the secondary level of production, converting purchased goods into products. Business X is responsive to large amounts of varying daily customer orders and so needs to be able to cope with those demands. Thus the business relies heavily upon its storage system, primarily refrigeration; it currently has 7 operating refrigerators. It has been noticed that the business is currently witnessing an increase in output, i.e. sold meals.

6.4 Appendix 4 Requirements for the Project                    

                        6.4.1 Internal Requirements


Table 3

Size Needs to fill up space (2.5 m x 1.0 m x 1.0 m)
Price Not yet known by the business
Efficiency

There are no specific requirements in levels of efficiency; however, a

the more efficient product would be preferred.

Appearance

As the machine will be positioned within the kitchen, there are no

specific needs on the product’s appearance.

Physical
Structure
The business requires that the fridge is able to be used as a bench,
i.e. has the flat tabletop structure of a table.

 

 

 

 

 

 

 

 

 

 

 

 

 

6.5 Appendix 5 Hidden Costs

                        6.5.1 Financial Costs

As all the products being analyzed come from the same seller, the running costs such as installation, maintenance, repairs and taxes are all the same and do not affect the decision regarding the alternatives and thus are omitted from this report.

                        6.5.2 Other Costs

There are also non-financial costs associated with this purchase; these may include devotion of time, effort and responsibility. When purchasing the fridge, the owner must take time and effort to consider factors regarding the product; this will be an opportunity cost. The owner may also have to arrange some sort of supervision over the instalment of the fridge, he may have to do this himself or pay someone else to do so. However, these costs apply to all the options and do not need analysis.

6.6 Appendix 6 External Requirements

                        6.6.1 Legislation

FSANZ states that “A food business must, when receiving potentially hazardous food, take all practicable measures to ensure it only accepts potentially hazardous food that is at a temperature of 5oC or below.” All of the analyzed products can reach this requirement. (“Food Hygiene and Temperature Control”)

6.7 Appendix 7 Procurement Alternatives

There are also alternatives opposed to the upfront purchase, as to how the business may be able to purchase the fridge, some of these methods include, leasing or personally designing the fridge. Leasing the product will enable the business to slowly pay for the purchase using small amounts of the retained profit, currently; they do not know where the finance will come from. Although another method is to design the fridge themselves to fit their own needs, this type of method is not particularly suited to the business’s purchase because this is time-consuming and the business is in need of only a simple fridge that satisfies their needs.

6.8 Appendix 8 Analysis of the Alternatives

            6.8.1 Cost Benefits of the Alternatives

                        6.8.1.1 Cost-Benefit Analysis of Option A
Table 4

Advantages Disadvantages
Cheapest of the three options Size is not essentially perfect according
to the business’s requirements
Flat Table Top – can be used as a bench  

                        6.8.1.2 Cost-Benefit Analysis of Option B
Table 5

Advantages Disadvantages
Has Six Doors – which means the
business can separate foods into more
categories
Smaller in size compared to Option C
Flat Table Top – can be used as a bench

More compartments mean less volume

of space

  Size is not essentially perfect according
to the business’s requirements

                        6.8.1.3 Cost-Benefit Analysis of Option C

Table 6

Advantages Disadvantages
Largest in size of the three options

Is the most expensive out of the three

options

Perfect size – according to the
business’s requirements
Does not have an entirely flat tabletop

6.9 Appendix 9 Product Details

            6.9.1 Option A

High-quality stainless steel cabinet and table board.

    •     Refrigeration equipment is easily taken out for cleaning and servicing.
    •     With auto return door which can stop warm air draft when the door left open and prevents loss of cooling from thermal transfer.
    •     Easily adjustable plastic coated shelves, which means that the refrigerated space can be made to suit your own requirements.
    •     Polyurethane foam insulation provides outstanding temperature preservation and reduces energy consumption.
    •     Auto evaporation of condensate water.
    •     The microprocessor can precisely control the temperature and is clearly shown on the LCD display panel.
    •     The arc angular design on the base plate complies with the requirement of sanitation certification.
    •     Removable door gasket for easy cleaning.
    •     The standard sandwich pan and shelf will enhance the presentation of the 
food. ” (3 Door Stainless Steel Salad & Pizza Catering Equipment.)

    •     High-quality stainless steel cabinet and table board.

    •     Refrigeration equipment is easily taken out for cleaning and servicing.
    •     With auto return door which can stop warm air draft when the door left open and prevents loss of cooling from thermal transfer.
    •     Easily adjustable plastic coated shelves, which means that the refrigerated space can be made to suit your own requirements.
    •     Polyurethane foam insulation provides outstanding temperature preservation and reduces energy consumption.
    •     Auto evaporation of condensate water.
    •     The microprocessor can precisely control the temperature and is clearly shown on the LCD display panel.
    •     The arc angular design on the base plate complies with the
    •     The requirement of sanitation certification.
    •     Removable door gasket for easy cleaning.
    •     The standard sandwich pan and shelf will enhance the presentation of the 
food.” (4 Drawers Stainless Steel Fridge Catering Equipment.)

            6.9.3 Option C

    •     High-quality stainless steel cabinet and table board.

    •     Refrigeration equipment is easily taken out for cleaning and servicing.
    •     With auto return door which can stop warm air draft when the door left open and prevents loss of cooling from thermal transfer.
    •     Good cold air circulation from the forced air fan, which enables quick effective refrigeration and uniform temperature.
    •     The well-designed lid of the salad case minimizes the gap between the top cover and the case body
    •     Polyurethane foam insulation provides outstanding temperature preservation and reduces energy consumption.
    •     Auto evaporation of condensate water.
    •     The microprocessor can precisely control the temperature and is clearly shown on the LCD display panel.
    •     The arc angular design on the base plate complies with the requirement of sanitation certification.
    •     Removable door gasket for easy cleaning.
    •     The standard sandwich pan and shelf will enhance the presentation of the 
food. ” (6 Drawers Stainless Steel Fridge Catering Equipment.)

6.10 Appendix 10 Interview Responses

    6.10.1 Interview with Jay Tran (owner of the business)

    •     Name: Jay Tran (owner)

    •     Would you like me to make all the contents in which you say anonymous?
            Yes
    •     Short term goals - increase market share
    •     Long term goals- renovate the restaurant to increase efficiency
    •     How many people are currently employed in your business? 12
    •     How are decisions made? I ask everyone’s perspective before doing anything
    •     Who is involved in decision making? Myself
    •     What were your Profit Margins last Month? (unable to be answered)
    •     What were your Profit Margins Last Year? (unable to be answered)
    •     What are your recent and past profit margins? (unable to be answered)
    

     QUESTIONS ABOUT THE FRIDGE
    •     Why do you need a new fridge? Store more things, so we can sell more things. There’s increasing sales as well.
    •     How do you feel about getting a new fridge? It would enable us to sell more things and therefore there will be an increase in sales, so I am positive about getting a new fridge. I don’t think there will be much risk in buying a new fridge.
    •     Do you have any idea about which model you would like to use? I’m not sure about the model but we would like a fridge that can be used as a bench. Currently, there is some empty space in the kitchen so we’re hoping to fill up that space with the fridge (Needs to fill up space (2.5 m x 1.0 m x 1.0 m)
    •     Are you replacing an existing one or are you getting another one? Getting a new one

    •     Will the new fridge affect the way you run your business? Yes, because things will be placed in different places, so we will have to adjust to the new fridge. I don’t think it will be hard though.
    •     What do your employees think about getting a new fridge? Well roughly, they all agree.
    •     How much are you prepared to pay for a fridge? We’re not sure about that yet.
    •     Where is the money coming from to get the fridge? not sure
    •     Are there any problems that are preventing you from getting a new fridge? Not known, but I don’t think there will.
    •     What are the benefits associated with getting a new fridge? We’ll be able to store more, sell more meals.
    •     What are the negative things associated with getting a new fridge? There are costs.
    •     Is this fridge an opportunity cost, i.e. are you making a decision to buy a fridge or something else like a microwave? We’re focusing on getting a new fridge first so no.
    •     Where will it be positioned? In the kitchen.

    6.10.2 Employee Response (assistant chef)

    •     How do you feel about getting a new fridge? I think the fridge will help me with my tasks. It is a good decision. I will probably have to change the way I carry out tasks, but it won’t affect me that much. We can buy and store more food. It will save us time to find the foods in times where it is hectic.

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