Business Decision Analysis

Business Decision Analysis

Pricing Decisions

Pricing decisions remain essential across various business industries. Making pricing decisions is expected to consider critical elements in sales trends, cost of sales, and expenses covered by the business operations. Mr. Neil, having specialized in handcrafted wooden train toys, understands essential elements of the business. Seeking to raise £20,000 through a new partnership aims at the increase of capital as well as general operation. Considering the current price of £15 per train, it is essential to review the pricing decisions to ensure the new partner’s impact is felt and fully captured in the operation of the business.

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Income trend-based pricing decision

The income trend of the business, as portrayed by the actual performance, presents high sales in the first quarter, low second quarter, and steady growth in the third and fourth quarters. The trend informs the first pricing decision. In the second and third quarters, the business will consider prices compared to entry point pricing to maintain loyal customers. The first quarter’s actual performance indicates that trains have high and low seasons in one year (Alpert, 2015). Taking note of this, low-performing seasons will attract averagely reduced prices to ensure market operations are maintained. However, the reduction of costs in low-performing quarters must be within the set margins to avoid losses in the name of business and market maintenance.

	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Income	52,320	48,570	51,480	70,320
Quarter Income Variance		(3,750)	2,910	18,840

The last quarter will mark the best performing period calling the business to consider advance pricing above the second and third quarters to capitalize on the high sales period. The trend of income is a clear indication of the high performance of the trains towards festive seasons.

Profit Margin Pricing Decision

Mr. Neil seeking a partner is no doubt aimed at expanding operation at the business. The expansion of the company is expected to yield a high income. Improving income through the development will take note of pricing decisions based on the profit margin. Consideration of the profit margin will first note the gross profit margin (HSU, 2016). The gross profit margin consideration will ensure the cost of goods sold is recovered. The cost of making the toys and improving their quality must be covered in the pricing decision.

Gross profit Margin = Gross Profit/Total Sales

= 173,699/222,690

= 78%

Taking note of the gross profit margin presentation, the business attracts high gross profit, indicating affordability regarding the cost of producing the toys. The pricing decision, in this case, will ensure the set prices across all four quarters do not go below 50% gross profit margin. The business is well placed in terms of managing the cost of making and improving the toys, allowing high gross profit, a factor supporting the primary objective of profit maximization and cost minimization. The price decision, in this case, must take as well a net profit margin to steer control of the expenses.

Net profit Margin = Net Profit/Total Sales

= – 1,479/222,690

= -1%

The company is making net losses at its current operational state. This makes it essential for the new partnership to consider a pricing strategy to increase the net income margin to 10%. The pricing decision, in this case, will thus consider £15 + 11%, this will ensure the 1% loss is covered, and a 10% profit is realized.

Current price = £ 15

Expected price = £ 15 + (£ 15 x 11%)

= £ 15 + £ 1.65

= £ 16.65

Assessment of Project Viability

Project viability assessment remains essential as it determines whether or not a project can be carried out. Many projects stall in the process; hence, viability assessment promotes important project decisions (Tagliapietra, Zachmann & Fredriksson, 2019). Viability assessment through NPV, payback period, IRR, PB, PI, and ARR allows the comprehensive determination of the project.

Net Present Value (NPV) = CF/(1+i)ⁿ

CF = £ 234, 110

I = 12%

N = 5

NPV = £234,110/(1+0.12)⁵

= £ 132,840.301

The NPV assessment qualifies the project. The initial investment level of the project is £20,000. At the same time, the NPV stands at £132,840.301, indicating that the project is viable and will make profits across the selected five years of operation.

Payback Period = CF/Initial Investment

= £ 20,000/£ 234,110

= 0.085 years.

The project will recover the invested amount in less than one year, a positive factor making the project highly viable. This makes it safe for Mr. Neil to consider debt financing as part of the business growth.

IRR = 132,840.301/£ 234, 110

= 0.56

= 56%

The internal rate of return IRR of the project is above 20%, making the project viable. Mr. Neil’s consideration of the project must thus be viewed as a positive strategy.

ARR = £ 20,000/132,840.301

= 0.15

= 15%

An accounting rate of return of above 10% marks a positive or viable project. In this case, the ARR is 15%, which qualifies the project for consideration.

PI = Present Value of Future Cash Flow/Initial Investment

CF = £ 234, 110

Initial Investment = £ 20,000

= £ 234, 110/£ 20,000

= 11.7055

Seeking a new partnership by raising £ 20,000 will steer the business to high levels of operation. The project will help Mr.Neil’s business move from a net loss to a possible net income. Taking note of the viability assessment tools applied, the project is viable. Thus, Mr. Neil should embrace it.

References

Alpert, M. I. (2015). Pricing Decisions. Glenview, Ill, Scott, Foresman.

HSU, H. (2016). The use of cost information in pricing decisions and cost management strategies.

Tagliapietra, S., Zachmann, G., &Fredriksson, G. (2019). Estimating the cost of capital for wind energy investments in Turkey. Energy Policy, 131, 295-301

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Scenario
Mr. Neil Down is the owner of WoodyTrain, a toy store specializing in handcrafted wooden train toys. Mr Neil
wants to raise £20,000 by getting a new partner. He has prepared an income statement put together
with his last budget to your attention as you expressed interest in being Mr. Down’s partner. The selling price of 1 train set is £15.

Woody Train
INCOME Actual Budget Difference
Sales
Sales – Qtr. 1 $ 52 320,00 $ 70 000,00 $ -17 680,00
Sales – Qtr. 2 $ 48 570,00 $ 60 000,00 $ -11 430,00
Sales – Qtr. 3 $ 51 480,00 $ 80 000,00 $ -28 520,00
Sales – Qtr. 4 $ 70 320,00 $ 90 000,00 $ -19 680,00
Total Sales $ 222 690,00 $ 300 000,00 $ -77 310,00

Cost of Goods
Beginning Inventory value $ 15 890,00 $ 15 890,00 $ –
Raw Material (Wood) $ 21 236,00 $ 16 000,00 $ 5 236,00
Labor to manufacture $ 45 325,00 $ 44 000,00 $ 1 325,00
Less ending Inventory value $ 33 460,00 $ 10 000,00 $ 23 460,00
Cost of Goods Sold $ 48 991,00 $ 65 890,00 $ -16 899,00

Gross Profit $ 173 699,00 $ 234 110,00 $ -60 411,00

Non-Operating Income
Interest Income $ 1 200,00 $ 1 200,00 $ –
Total Non-Operating Income $ 1 200,00 $ 1 200,00 $ –

Total Income $ 174 899,00 $ 235 310,00 $ -60 411,00

EXPENSES Actual Budget Difference
Operating Expenses
Account and Legal $ 1 450,00 $ 1 450,00 $ –
Advertising $ 5 000,00 $ 6 500,00 $ -1 500,00
Depreciation $ 750,00 $ 750,00 $ –
Insurance $ 7 500,00 $ 7 500,00 $ –
Interest Expense $ 23 000,00 $ 23 000,00 $ –
Maintenance and Repairs $ 1 200,00 $ 1 200,00 $ –
Office Supplies $ 1 560,00 $ 1 000,00 $ 560,00
Rent $ 60 000,00 $ 60 000,00 $ –
Salaries and Wages $ 61 455,00 $ 54 000,00 $ 7 455,00
Telephone $ 720,00 $ 600,00 $ 120,00
Utilities $ 4 500,00 $ 4 500,00 $ –
Web Hosting and Domains $ 200,00 $ 200,00 $ –
Total Operating Expenses $ 167 335,00 $ 160 700,00 $ 6 635,00

Non-recurring Expenses
Furniture $ 4 599,00 $ 3 000,00 $ 1 599,00
Gifts Given $ 4 444,00 $ – $ 4 444,00
Total Non-recurring $ 9 043,00 $ 3 000,00 $ 6 043,00

Total Expenses $ 176 378,00 $ 163 700,00 $ 12 678,00

Net Income before Taxes $ -1 479,00 $ 71 610,00 $ -73 089,00
Income Tax Expense $ -295,80 $ 14 322,00 $ -14 617,80
Net INCOME $ -1 183,20 $ 57 288,00 $ -58 471,20

Using the above information, kindly answer the following:-
1. Make pricing decisions using relevant data/information with numerical illustration/calculation and explain why you have made these pricing decisions.
2. Assess the viability of this project using investment appraisal techniques such as NPV, payback period, IRR, PB, PI, ARR, etc – this needs to be discussed with numerical illustration and calculation.