Business Memo for Hunter’s Retail and Repair Business

Executive Summary

Maintaining customer privacy is essential business ethics in a computer repair and retail business because it entails handling confidential information. I developed the business memo based on the case Hunter experienced when dealing with Erick, who owns a computer repair shop where sensitive information was leaked to the press. The situation resulted in the idea of opening a new retail and repair shop to compete with Erick after failing to maintain the privacy of Hunter as a customer at his computer shop. However, Hunter also experiences various challenges in identifying the optimal financing approach. He also wonders whether the business will generate enough revenue to withdraw after operating for the first year. The case also presents the issue of deciding whether to invest in a new machine estimated to increase the computer repairs and minimize the costs. Tracking the expenses for a new community project is also an issue that Hunter is facing. The paper will analyze and address the problems facing the new business idea and offer comprehensive recommendations on the necessary action.

The memo includes an income statement and statement of earnings based on the projected data for the computer retail and repair shop during the first year of operation. It was clear that the new business requires a clear capital structure that considers the size and nature of the retail and repair shop. Moreover, choosing the most effective financing option is vital for a startup business because they are considered risky. The business report recommends the development of a compelling financing mix that balances ownership, risk, and repayment obligations. The analysis has shown that debt financing would quickly render the business bankrupt if it fails to generate enough revenue to manage its short-term liabilities. Although equity funding may seem an option, it is essential to consider the optimal combination of debt and equity to ensure the business is smooth. Investing in new machines is also vital for improving efficiency and minimizing costs. The approach of the return on the acquisition is suitable because it factors in the machine’s price, depreciation, and profit to determine if the purchase is a viable investment for the new computer shop.

Issues

An analysis of the case has presented different issues ranging from significant accounting, finance, and business issues. Given the importance of observing the business ethical practice of respecting and maintaining the client’s privacy, it is clear why someone might be concerned with a computer repair attendant who failed to uphold confidentiality with client information (Martínez et al., 2021). The case has presented a situation where Hunter is faced with a problem of lack of professionalism from a computer repair shop attendant named Eric. The incident resulted in the leaking of private information from Hunter’s personal computer to the press. The business aimed to open a computer repair and retail shop to offer alternative solutions to clients. It would provide solutions by enhancing the ethical business practice of confidentiality and professionalism.

After discussing the business idea with his friend Michelle, it was projected that the shop could manage to sell up to 85 computers each at a retail price of 495 USD during the first year of operation. The quote from a central computer manufacturer offered a bundle of 5 computers for a fee of 1,625 USD, ten computers at 3,150, and 100 computers at 28,500. The business projection is about delivering 150 laptop repairs after charging 95 USD each during the first year of operation. Considering that Hunter needs to be more competent with computer repairs, the labor cost the business expects to incur is up to 40 USD. It expects to incur 10 USD material costs and 5 USD variable overhead costs. The laptop retail and repair business also expects additional expenses such as monthly rent of 1,300 USD, 200 USD for running ads monthly, and monthly utilities of 350 USD.

One of the critical issues facing Hunter’s business proposition is that the projection needs to be revised to cover more than two years of business operations. Hunter expects to improve the business by 50 percent in the second year of operation and maintain growth in the following years. As a result, a trend analysis is essential to predict the development of the business beyond two years. Another issue the case study presents entails determining an optimal financing mix for a laptop retail and repair business. Based on the case scenario’s information, the available sources for financing the business include a combination of debt and equity. The debt will result in monthly payments of 150 USD for interest, while equity financing will result in 15,000 USD for dividends per year. The business memo targets to provide feedback on the owner’s plan to employ a combination of debt and equity to finance the business. Addressing the advantages and disadvantages of using equity and debt is vital to identify the effectiveness of the business financing decision.

Hunter is interested in determining the total possible profit withdrawals from the generated profit after one year of business operation. The withdrawal would result in crediting the bank account, reducing the cash balance available in the business. The issue demands an income statement to portray the projected retained earnings from the business after operating for one year. Table 1 below portrays the income statement for the retail and repair shop for one year. It will be applicable for determining whether the generated profits for one year will be enough to make the withdrawals.

Investing in purchasing a machine focused on minimizing the cost of hiring the labor force to 15 USD is another issue that the case study presents. The new machine targets to repair 1500 laptops before they are replaced. Understanding the depreciation method that applies to the new machine is vital to analyze whether the purchase decision is beneficial to the business (Chinloy et al., 2020). Purchasing the machine will be worthwhile if the return on investment is considerably high. The purchase will be worthy if the new machine generates enough profit before it depreciates.

The computer retail and repair shop is facing the issue of tracking the cost of running the new project that is focused on helping the members of the local indigenous community, especially children. The owner of the business idea plans to gather volunteer help to in manufacturing 50 computers to sell to a local school at cost and later distribute them for charity. It presents an issue of tacking the costs associated with the project assuming some specialized workers such as supervisors are paid hourly.

Assuming that the project does not receive enough volunteers, additional costs for utilities and line workers requires consideration when conducting the analysis. The ultimate goal is to determine the costs associated with producing the laptop and how much they can be sold to the local schools to make a profit or break even. As a result, the business report will evaluate critical aspects of cost tracking to assist the owner of the business idea in making informed decisions. The important elements of the project will be addressed including all the necessary journal entries.

Analysis

The business plan for a laptop retail and repair business idea has presented different quantitative and qualitative issues in accounting, finance, and business ethical practices. Based on the information that Michelle’s projection provides, the income statement and retained earnings formed part of the analysis. The results in Table 1 show that the shop expects to generate a net income of $1,300 after operating for one year. The net income determination involved deducting the expenses from the projected revenue from the first year of business operations.

Table 1: Income Statement

The information that the case presents shows that the new business expects to sell 85 laptops each at an average price of 495 USD each and 150 laptop repairs for $95 each, the projected 3 revenue of $56,325 is reasonable and attainable. This sum reflects the anticipated sales and service income from laptops. Based on the most recent quote, namely $28,500 for a batch of 100 computers, I have thought about Hunter’s purchase of laptops. This results in a $285 price tag per laptop. The analysis resulted in a total of 24,225 USD for the entire cost of the laptops purchased multiplied by the anticipated sales volume of 85 computers under one year of operation.

The analysis also shows that the net income before deducting any expenses is 56,325 USD from the revenue created from the sale of the laptop sales and repair. The expected cost of purchasing the computers using a price of 285 per unit resulted in a total cost of 24,225 USD. Labor costs for repairing totaled 6000 USD after factoring in a monthly labor cost of 40 USD as the income statement table 1 presents. The material costs entailing the direct supplies required for computer repair were recorded at 1,500 USD for 10 USD each. Variable overhead expenses estimation was at 5 USD monthly resulting in a total of 750 USD. The analysis of the total cost of goods sold resulted in a total of $32,475 while a total of $23,850 gross profit was the calculated difference between total sales and COGS.

The income statement also recorded a gross profit margin of $42.38 which is the fraction of the revenue generated from the sales revenue after deducting the COGS. The ratio demonstrates that the business has a high-profit generation margin that covers the operating expenses for the one year of operation. The operating expenses for the new repair and retail business include the monthly rent of $1,300 which resulted in a total of $15,600 for the one year. The monthly utilities of $350 recording were at $4,200 per year and the total cost for advertising was $2,400. The projected interest rate of $150 per month resulted in a total cost of $1800 per year.

The thorough analysis of expenses related to laptop sales and repairs helps to highlight the critical role that wise cost management plays in achieving a favorable gross profit margin. The results from the calculations of the costs of goods sold (COGS) included labor costs, material requirements, and variable overhead costs. It analyzed the complex mechanisms that improve the business. Its analysis involved focusing on the connections between income creation and frugal spending, ultimately determining Hunter’s Laptop Retail and Repair’s financial performance.

A thorough analysis of running expenditures including the monthly rent, utilities, marketing, and interest charges, provides a better picture of the business’s financial situation. Despite the recorded net loss of ($150), the business report has identified the possible issues and provided recommendations to set the new business up for long-term success. The evaluation acts as a roadmap for the business plan to attain successful results by highlighting the key areas for cost optimization and underscoring the strategies for the management to guide the business toward long-term success.

Statement of Retained Earnings

Table 2: Statement of Returned Earnings

The earnings statement also shows that stockholders were projected to receive a total of $15,000 in dividends as a return on their investment. The analysis resulted in a total of ($15,150) ending balance which depicts the cumulative impact on the business’s net loss and dividend payments in one year. A negative ending balance portrayed by the statement of retained earnings for the business after operating for one year shows a decline in retained profits. The Statement of Retained Profits gives a quick overview of how retained profits have evolved for a corporation over a specific period. It displays the impact created by the flow of a business’s net income and dividends on the financial strength. The statement resulted in a negative ending balance because of the initial lack of retained profits after operating for one year. The lack of profits and the payment of dividends resulted in the loss sustained during the year as portrayed in Table 2.

Debt financing alone is risky for an organization but it provides a tax shield for profits when combined with equity financing. Similarly, employing equity financing puts the new business at risk because it can be demanding, costly, and time-consuming. The approach is also associated with affecting the focus of the management away from the core business operations and the goal of maximizing profits (Nazir et al., 2021). It is also vital to consider the return on investment from purchasing a new machine to ensure that the owner opts for the most economically viable decision. Investment decisions are evaluated based on net present value techniques, internal rate of return, and annuities.

Table 3: Machine Depreciation using NBV

The machine requires an initial investment of $30,000 to minimize the cost of repair by lowering the labor cost by repairing a total of 1500 laptops during its helpful time. A total of 150 repairs projections during the first year were to improve by 50%. The projections are essential for distributing the repairs based on the machine capacity, which results in 5 applicable years, as indicated in Table 3. According to Fariantin, (2019), the return on investment is the financial value of an investment compared to its cost. Since the investment in repair machines gives Hunter considerable profits and a high return on investment, he should invest in it to improve the computer shop. The analysis shows that the machine will operate for five years and depreciate on a straight-line basis with a depreciation expense of $6,000 per year. In addition, the machine will generate a total return of $53,156.25; therefore, it is a worthwhile investment.

Recommendations

The predicted income statement for the first year provided a detailed analysis of the forecasted financial performance of Hunter’s Laptop Retail and Repair. Considering that the business is a start, the business owner should opt for financing it using equal proportions of debt and equity. The optimal financing mix in the capital structures is indispensable to achieve the level which minimizes the weighted average cost of capital and can increase the value of the business. The business idea owner should also focus on tapping into new opportunities in the market by using the generated profit to expand instead of making profit withdrawals. The results from the analysis have demonstrated that profit withdrawals will negatively affect the business’s financial position. For instance, the business has not shown the potential for generating enough cash flow as indicated in the statement of retained earnings.

The business owners should also invest in the new repair machine since it has positive returns on investment. The purchase decision of the machine is identified as an economically viable investment because it has the potential to operate for the next five years and generate a total of $53,156.25 in returns. The owner of the business idea should also implement an inventory control system to help in stock tracking for the new community project. The system can be useful in distinguishing between various types of costs for the project s (Rudito et al., 2022). The business expects to set aside a budget for the production of the 50 laptops in addition to implementing cost controls to ensure that the correct amount is used in the production.

Conclusion

It is essential to maintain customer privacy when running any business operation. The case scenario focuses on a computer repair and retail business that handles confidential information. The paper features business memo for Hunter who desires to open a new computer repair and retail shop following costly privacy issues that erupted while working with Erick. The case features Hunter who is in dilemma; Unable to make well-informed decisions on optimal financial approach he requires to start his venture. Purchase decisions, lack of professionalism and cost tracking are major difficulties Hunter is facing in embarking on a computer retail and repair business. Lack of professionalism resulted in leaking of privacy information to the press. The memo touches on the income statement of Hunter’s business in its first year of operation. Achieving success in the newly opened computer shop will require the business owner to utilize opportunities in the market and channel financial resources. Effective investment in new repair machine could increase earnings for Hunter’s business.

References

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