Steven Farrow is considering opening a franchise liquor store next to a new retail shopping center: Based on historical data from other franchise stores and a careful market study, he is confident that the store can achieve monthly sales of $180000. Variable costs (excluding rent) will be approximately 70 percent of sales dollars. Rent will be 7 percent of sales or $11000, whichever is higher. Initial cost of the franchise is $126000, paid for in one lump sum.
Monthly fixed costs consist of:
Installment loan for leasehold improvements $1800
Salaried employees (4 at @2750) $11000
Owner's salary $15000
Franchise fee $4000
Insurance, property taxes, ect. $3200
Total fixed costs $35000
A warehouse store with a discount liquor department is considering moving into the neighboring retail development. Steven knows that while his merchandise will be carefully selected and his customer service top-notch, the new store would take some of his business. If the warehouse store does move in, he calculates his sales would decline by at least 10 percent but not more than 18. A decline of even 10 percent would require him to reduce the cost of salaried employees to $10000. Steven considers a 15 percent annual return on his initial investment in the franchise as the minimum return necessary to justify opening the store.
Required:
Mr. Farrow is familiar with your reputation for brilliant financial analyses and has come to you for help. Prepare an analysis of the situation for him that includes the following:
1.The estimated monthly volume in sale dollars required in order to generate the desired return on his investment assuming (1) the warehouse store does not move in and (2) the store does move in and sales decline by at least 10%.
2. A comparison of these amounts to the projected sales figures.
3. A discussion of strategic/qualitative factors that should be considered.
4. At least one graph to demonstrate your findings.