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    Babson Case

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    Syed Qamar
    This case study analyzes the feasibility of Moawia opening a fruit juice stand called "Sombrero" in the new Al Ain Mall. To break even, the analysis finds that Moawia needs approximately 21,518 customers in the first year. To earn a profit of DH 30,000, Moawia needs around 25,268 customers. On a cash basis to avoid bankruptcy, Moawia needs at least 19,900 customers in the first year.

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    Babson Case

    Uploaded by

    Syed Qamar
    252 views4 pages
    This case study analyzes the feasibility of Moawia opening a fruit juice stand called "Sombrero" in the new Al Ain Mall. To break even, the analysis finds that Moawia needs approximately 21,518 customers in the first year. To earn a profit of DH 30,000, Moawia needs around 25,268 customers. On a cash basis to avoid bankruptcy, Moawia needs at least 19,900 customers in the first year.

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    This case study analyzes the feasibility of Moawia opening a fruit juice stand called "Sombrero" in the new Al Ain Mall. To break even, the analysis finds that Moawia needs approximately 21,518 customers in the first year. To earn a profit of DH 30,000, Moawia needs around 25,268 customers. On a cash basis to avoid bankruptcy, Moawia needs at least 19,900 customers in the first year.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    252 views4 pages

    Babson Case

    Uploaded by

    Syed Qamar
    This case study analyzes the feasibility of Moawia opening a fruit juice stand called "Sombrero" in the new Al Ain Mall. To break even, the analysis finds that Moawia needs approximately 21,518 customers in the first year. To earn a profit of DH 30,000, Moawia needs around 25,268 customers. On a cash basis to avoid bankruptcy, Moawia needs at least 19,900 customers in the first year.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    CASE SOLUTION FOR BABSON GLDE PROGRAM

    This case study has been prepared by Sohaib Bin Shahid and Umer Fariq for the Babson GLDE Program nomination process.

    This case is intended for academic purposes only. Distribution or copying without prior permission from the Institute of Business Administration, Karachi is not allowed.

    Babson GLDE Program: Case Study

    1) Should Moawia open a fruit juice stand in the Al Ain Mall?


    I believe that Moawia should certainly open Sombrero in the Al-Ain Mall due to the opportunity that he sees in the form of a fresh juice stand. We will start our discussion by shedding light on some disadvantages that Moawia has to encounter. Firstly, Moawia will have to consider that 60% of the population (180,000 people) is of expatriates who generally go to Abu Dhabi mostly for business opportunities and send remittances to their homeland. Therefore, these people are very conscious of their spending and 10DH per glass of juice might prove to be too costly for these individuals. Lowering the selling price to approximately 7DH will lower his margin but would enhance the percentage of repurchase consumers and thus, total volume. Moreover, school students also have a fixed amount of allowance so they might buy more if it is in their budget. So, I believe that it is better to sell more at a lower margin than to sell less at a higher margin. Secondly, the Name of the Juice Stand is slightly irrelevant and difficult to understand. It is absolutely wonderful to have unique, non-generic name that doesnt restrict to a product/service line, but it is equally important to have a name that people can relate to and promote the values related to a juice stand. Lastly, Moawia does incorporate a lot of risk due to his high fixed costs for a startup i.e. if he is unable to breakeven he will have to pay for these high fixed costs any way, at least for the lease of the year and his loan repayment. To reduce the risk, he can pair up with a partner; which will reduce his individual profit but he can certainly divide his risk this way. Given all the disadvantages, he should still go ahead with the business and there are numerous reasons for it. Firstly, since there is a new mall opening up, there will be huge amount of trafficking the coming year. Being the only mall in town and not many options to go to for shopping, there is a high probability that he will be profitable in the first year as well. High number of students in the town (13000) will increase his market because youth tends to respond well to such products than the older people. Secondly, Moawia enjoys making juices and it is essential for an entrepreneur to have a passion for what he/she does. The infatuation and his personal learning would bring a lot of creativity and innovation in his business; already he is delivering 30 variations in the beginning which is incredibly good. Moreover, there is a trend of moving away from the carbonated drinks in the past decade and more juice products have become successful in the market. Thirdly, Moawias low debt finance policy for his startup will allow him to have fewer obligations. Out of his initial investment of 64,400DH, he is paying 44000DH himself which means there has been a lot of savings and he wont be in a lot of debt incase of liquidation.

    Babson GLDE Program: Case Study

    2) How many customers does Moawia need to break even?


    In order to analyze the break-even point, we need to determine three factors for Sombrero business model. These are as follows: 1. Revenue: The average customer order of Moawia is for DH 10 2. Variable Costs: The variable cost per order is DH 2.0 (which includes DH 1.2 of fruit powder, DH 0.35 of ice-cream powder and 0.45 of serving cup) 3. Fixed cost: These are the cost which the business has to pay irrespective of its operations i.e. these costs do not depend on sales volume. These are summarized below. Fixed Cost Elements Lease Pay Water & Electricity (800*12) Maintenance & Security (700*12) Wages + Employee Accommodation (1600*4*12) Leasehold Improvement Depreciation (12000/5) Total Equipment Depreciation (52700/5) Interest Payment (200*12) Principle Repayment Total Fixed Cost DH 60,000 9,600 8,400 76,800 2,400 10,540 2,400 2,000 172,140

    For simplification, we would assume that the break-even point is X. Break-even would be achieved when the total revenue will equal the total cost i.e. both the variable and the fixed costs. Thus at the break-even point, Total Revenues=Total Cost Total Revenue = Total Fixed Cost + Total Variable Cost 10X = 2X + 172,140 8X = 172,140 X = 21,517.5 ~ 21,518

    Conclusion: In order to break even, Moawia needs at least 21,518 orders in his first year
    of business.

    Babson GLDE Program: Case Study

    3) How many customers does he need to earn a profit of DH 30,000?


    Since Moawia wants to break even with a profit of DH 30,000, we would add DH 30,000 to the equation illustrated in the previous question. Total Revenues = Total Cost + Target Profit Total Revenue = Total Fixed Cost + Total Variable Cost + Target Profit 10X = 2X + 172,140 + 30,000 8X = 202,140 X = 25,267.5 ~ 25,268

    Conclusion: In order to break even with a profit of DH 30,000, Moawia needs at least
    25,268 orders in his first year of business.

    4) How many customers are needed to break-even on a cash basis in order to avoid bankruptcy?
    In order to determine the break-even point on a cash basis, we would just ignore Depreciation Expense in Sombreros fixed costs since depreciation is a non-cash expense and is never included in any cash flow summary. Thus, the fixed costs would be: Fixed Cost Elements Lease Pay Water & Electricity (800*12) Maintenance & Security (700*12) Wages + Employee Accommodation (1600*4*12) Interest Payment (200*12) Principle Repayment Total Fixed Cost Total Revenues=Total Cost Total Revenue = Total Fixed Cost + Total Variable Cost 10X = 2X + 159,200 8X = 159,200 X = 19,900 DH 60,000 9,600 8,400 76,800 2,400 2,000 159,200

    Conclusion: In order to break even on a cash basis, Moawia needs at least 19,900 orders
    in his first year of business.

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