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Assessor Date of marking

Mark

Assessment Cover Sheet

Do not write below this line. For Polytechnic use only.

Comments:

By submitting this assessment for marking, either electronically or as hard copy, I confirm the

following:

This assignment is my own work Any information used has been properly referenced. I understand that a copy of my work may be used for moderation. I have kept a copy of this assignment I have read and/or attached the Turnitin Originality Report

Due Date: Date submitted:

Course No.:

Student Name:

Student ID:

Tutor Leon clark

Course Title: Economic and finance

TLB 6000

Zainab Ahmed alhaddad

201100327

19 Oct 2013

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Table of Contents Purpose ..................................................................................................................................... 3

Introduction ............................................................................................................................... 3

Body .......................................................................................................................................... 3

Why this Ice-cream will be demanded? ................................................................................... 3 Location and business requirements........................................................................................ 6

Breakdown costs list ................................................................................................................ 8

Fixed and variable costs ........................................................................................................... 9

Selling price and Breakeven point .......................................................................................... 10

Calculation Process ................................................................................................................ 11

Factors influence pricing decision .......................................................................................... 12

Conclusion ................................................................................................................................ 13

Appendix .................................................................................................................................. 14

References ................................................................................................................................ 15

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Purpose The purpose of this report is to identify a service required in Polytechnic campus and major its success by specifying demands and location, calculating the costs of its requirements and analyze the influences on the price.

Introduction Bahrain polytechnic premises is containing around five thousand population combined of polytechnic students and Bahrain university students. The regular studying hours are approximately between 4 to 6 hours. The studying day in majority starts between 8 o’clock and ends at 7 O’clock. However, the lake of restaurants and food resources is making a big problem for students where they sometimes wait around an hour to receive their orders specially in peak hours between 12 to 3pm. Not to forget the crowd in Bashayer cold store that contains a small verity of options.

According to that, I have decided to open an ice-cream shop that provides different flavors that suites most of people tastes. Also, there would be tables and chairs inside the store for air-conditioned service and outside the store for smokers.

Why this Ice-cream will be demanded? Product demand is based on many factors, each factor has an influence on the product of whether it will be successfully purchased or it will result in a business loss. These factors relatedness is explained on the following points. (Moodle, 2010)

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Climate and Seasonality

Thinking of Bahrain climate nature, it could give a reasonable answer of why ice-cream shop was chosen. Bahrain is famous by its extreme temperature and hot climate during the year which raised the shares of ice-cream shops. Regarding the fact that winter could be colder but that do not erases the fact that people still purchase ice-cream. But, not forgetting the fact that polytechnic is an educational institute where students gets holidays as well as the staff. Where demands decrease or completely stop.

Peaks and troughs

to stop business because operating means to gain more expenses rather than profit where demands are approximately zero.

Quality

Now let’s spot the lights on the quality of the product, design and services. Customers are attracted to verity in options, unique designs and comfort. When that happens, the price importance to the customer decrease. That is called an added value services. The ice-creams will be provided in a unique bowels and colored spoons that gives the place an emphasizing atmosphere. There would be colorful chairs, tables and air-conditioned premises. Also, there will be "take away" service providing a packaged fresh ice-cream with any added sauce or fruit that customers ask for. Not to forget the smoking area which will be limited on the yard.

0%

50%

100%

Demand

Demand

Peak periods in daily term could be

considered as the studying days (Sunday

to Thursday) specially between 12pm to

3pm. Peak hours are where there are

maximum number of class and demand

for food. Where other hours between

8am-12pm/ 3pm-4pm there are less

demands. While in weekends it is better

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Price and income

A survey was conducted to find out the price that people can afford to buy an ice-cream. Most answers were suggesting that price is between 0.500 to 0.700 BD Which is based on the majority income level. And our business will try to cut costs in order to satisfy the customers.

The price of other goods and services

Product quality, design of the place, number of workers and their performance are playing a vital role in attractiveness to the business, and that for sure is considered as a cost on the business. Attracting factors must combine together to gain more customers rather than being a burden on business. As a start there would be one worker taking the responsibility of serving and cleaning. when there are more customers to be dealt with, increasing staff and specifying responsibilities will happen.

Subsidies and taxations

This applies on ingredients costs like milk for example. Where there are some types are supported by Bahrain government to encourage the local products. While on the other hand importing equipments demands some sort of taxes. All these influence the price positively or negatively.

The relative prices

Ice-cream shop has some hidden costs formatted as electricity, staff wages, cleaning tools and premises rent. Where also decorations, advertisements and attractiveness are hidden but un-frequent costs.

Changing in population

Polytechnic population is not stable because students and staff frequently vary. For example, in every semester there are new students accepted and there are graduated students starting from this year. Not to forget that withdrawals, demotions or absenteeism influences the daily demands.

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Customers demands

Location on Polytechnic map and the requirements for this business

The best location to settle the business is between building 8 and 12 and that goes to:

It’s a close location to students classes and staff buildings where most of students pass through this area while travelling from one building to another. There are chairs in front of 26 building and it is a crowded area specially in peak hours. It’s close to Bashayer cafeteria that most of students buy their lunch from. There are already built premises on this strategic location but it needs some maintenance which saves the costs of building a new store.

There are limited buildings that contains chairs to sit in specially in short break period, where students may sit inside and order an ice-cream just to sit in an air conditioned place near their next classes.

100%

0%

Students agree

Yes No

A survey was conducted to analyze customers

demands for this type of business. The idea

gained full agreements of the participant

students and tutors which gives a positive

reflection of whether it will be a successful

business or not.

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A survey was made to knowledge customers demands of what flavors they prefer and what they would like as an extras (Appendix). The results came up as the following.

Therefore, in order to operate this business actively, all business requirements and costs must be calculated. A list bellow was prepared including all requirements of premises needed, power, equipments, materials and ingredients used to create this business specified with its costs.

26%

42%

32%

Flavours

Strawberry Chocolate Vanillia

30%

24% 19% 6%

21%

Additions

Strawberry Red berry

Caramel Mango

Chocolate

The results of yogurt preferred was

close. so the three flavors were chosen

as the basic flavors of the shop. Vanilla

will be provided every day, while

strawberry and chocolate will be

provided on subsequent basis. Example,

Sunday (vanilla + chocolate), Monday

(strawberry + vanilla).

Another question was conducted to

analyze customers taste of yogurt extras.

The maximum percentage was voted for

red berry, where strawberry, chocolate and

caramel came on the next ranks. However

mango has been removed from ingredients

selected for the product because it scored

very low percentage and keeping it may

increase expenses rather than profit.

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Breakdown Cost List (Amazon, 2013) (LuLu hyper market, 2013) Picture Descriptions Price Picture Descriptions Price

Ice cream maker 375.000 BD

Ice cream mix 0.890 BD per

box

500 cup with lids

5.606 BD

Strawberry- cost vary according to

weight 1.070

1000 colored spoon 12.873 BD

Red berry 3.000 BD

3 Storage box 1.871 BD

Caramel 1.025 BD

Colored tables (4 Tables)

138.849 BD Chocolate 1.025 BD

Set of colored chairs (12 chairs)

177.337 BD

Milk- pack of 4

1.415 BD

Ice-cream bowels (48 piece)

44.544 BD

Electricity & water Monthly

30-50 BD approximate

Cleaning tools Dettol

Towels pack

2.275 0.575

2.450 BD

Monthly 150.000 BD

Pack of 50 piece 0.250 BD

From 9am-4pm 100.000 BD

Cleaning plastic bags Pack of 30

0.750 BD

Total Cost Approximate

1068.355 BD

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Fixed and variable expenses Before details lets explain the meanings of both terms: Fixed costs are the costs that does not vary according to amount of goods or services produced and it should be paid by the company. But it could vary after a period of time. These costs are counted on products selling price and it should be divided equally according to production amount ability. It could also be directly related to the product or it has an indirect relation. For example, store rent is not involved in production process but it still has an influence on pricing decision. (investopedia, 2013) Variable costs are the expenses that vary according to the amount of production. It’s the Costs that increase with production increase and decrease with less outputs. And it also influences pricing decision (Investopedia, 2013) Each cost was classified on the table below showing whether it has a direct relation to the product or it has indirect relation. (MOODLE, 2010)

Total fixed cost were added together and it gives the result of 987.601 BD. where total variable costs that has a direct relation to the product is 25.129BD. This amount was broke down in order to calculate the maximum variable cost per unit which is 0.230 BD.

Type Fixed Variable

Direct

Worker salary

Depreciation cost

Ice cream mix Fresh fruits and Milk

Plastic cups Plastic colored spoons Chocolate and caramel

Transparent plastic bags

Indirect

Store rent Ice cream maker Decoration costs Serving bowels Storage boxes

Cleaning tools cost Cleaning Plastic bags Electricity and water

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Selling Price and Break Even Point (BEP) Before getting in the details lets first explain the meanings of each term: Selling price is the agreed value to purchase a specific quaintly of goods or services. In order to make it successful it should be a rational value. (dictionary, 2013) Breakeven point is the amount of revenue must be gained in order to cover all expenses and to reach an equal point between loss and Profit. It is also the first step toward profitability. (INVESTOPEDIA, 2013) A survey was made to analyze the necessary data that enables the business of calculating the selling price.(Apendex)

According to the survey made, most of students has voted for 0.500 to 0.700 BD as a selling price and they are going to buy it twice a week. In order to get maximum profit, one kind of fruit or added sauce is given with ice-cream, 0.200 BD is counted as an addition when extras were requested. However, according to their demands calculations was made to detail cost and profit at this selling price.

6%

31%

63%

Price afforded

1BD 0.700BD 0.500BD

12%

50%

22%

16%

purchasing recurrence

every day Twice a week Once a week Other

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Calculations process: (Yahoo, 2008) Capital x Return Ratio = Desired return on capital 1068.355 x 25% = 267.084BD Produced unites x variable cost per unit + fixed cost + Return on capital = Sales 5000 Unit x 0.230 + 987.601 + 267.084 = 2404.685 BD

Sales ÷ produced units = selling price per unit

2404.685 ÷ 5000 = 0.480 BD Selling price per unit - Variable cost per unit = Contribution margin 0.480 - 0.230 = 0.250 BD

Fixed cost ÷ contribution margin = Breakeven point (units)

987.601 ÷ 0.250 = 3950.404 Unit

Breakeven point ÷ estimated unit per day = days to meat breakeven point

3980.404 ÷100 = 39.5 Days Ratio Selling price per unit 0.480 (100%) Variable cost per unit 0.230 (47%) Contribution margin 0.250 (52%)

Fixed cost ÷ contribution margin ratio = Breakeven point (BD)

987.601 ÷ 0.52 = 1899.233 BD Minimum 3951 Units or 1899.233 BD must be sold to equal the expenses incurred. If 100 units were sold per day, breakeven point could be reached within 40 trading days. This pricing calculations may not be effective in all conditions because still there are some factors that influence pricing decision.

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Factors influencing pricing decision

Regarding the fact that polytechnic doesn’t contain an ice cream store, it still has a competition resulted of the ice cream sold in Bashayer cafeteria. This means, monopoly chance is not available which limits the price and the profit. This is called imperfect competition, where there are small number of sellers (oligopoly). If another competitor arise, price might forcedly decrease, and cutting cost will be necessary. Also there will be more demands for creative ideas that is able to gain customers satisfaction. Transporting the fresh fruits every day is adding fuel costs. Which demands choosing a cheap supplier regarding the distance or more expensive supplier but in close area. Ingredient costs are depending on market condition whether there are inflation or subsidies market which means price of products is a sensitive factor. If ingredients or materials cost increased because of any reason, it could also disturb the expenses and the profit. Using high quality local products could decrease costs. Exchange rate that is influenced by the economic performance, terms of trade, public debt, inflation, interests rate and current account deficits also has an impact on pricing. (INvestopedia, 2010) If more ice-creams options were provided at a cheaper cost in Bashayer cold store, it may transfer the customers loyalty to other products. Taxes amount are considered as an additional cost which it applies on the imported materials. For example, plastic cups and spoons. If an equivalent product were available in Bahrain, the business should deal with its suppliers which will reduce the variable expenses. Worker salary is also influencing the price were Bahrain labor law prevents employing Bahrainis for lower than 250 BD. This demands employing foreign worker with lower salary to reduce the indirect fixed costs. If Bahrain polytechnic suddenly decided to change the premises rent it could disrupt pricing decision of an increase.

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Electricity cost and water expenses may differ after a period of time where it could be cheaper or more expensive according to the amount of demand for this service. Where it increase in summer and reduce in winter. Fuel price increase does influence the logistic services costs and so on the shipping prices which results in price inflation.

Conclusion According to the previous analyzes of the ice-cream store, this business seems a successful project to start on. The reasons of success were explained as the factors of demand where it showed all the statistics that is controlling customers, price and market condition. These factors were supporting this business because it has low variable expenses where the fixed expenses could be covered by reaching breakeven point. As it was mentioned, the store will be located between building 8 and 12 resulted of its strategic location. Therefore, the fixed and variable costs were classified and selling price was calculated in order to analyze the breakeven point of business which is selling 3951 units. Not to forget the factors influencing the price which is summarized by the competition, domestic and local market conditions. If all these criteria were taken on consideration, success could be gained in Bahrain Polytechnic. Success means the opportunity of growing business. The store will expand to provide more chairs and tables, more flavors and extras which matches all tastes. And maybe there would be a chance to reduce selling price by dealing with cheaper suppliers.

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Appendix

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References

Amazon. (2013). Retrieved from http://www.amazon.com/

dictionary, B. (2013). selling price. Retrieved 2013, from

http://www.businessdictionary.com/definition/selling-price.html

INvestopedia. (2010, July 23). 6 Factors That Influence Exchange Rates . Retrieved from

http://www.investopedia.com/articles/basics/04/050704.asp

INVESTOPEDIA. (2013). Breakeven Point. Retrieved from

http://www.investopedia.com/terms/b/breakevenpoint.asp

investopedia. (2013). Fixed Cost. Retrieved from

http://www.investopedia.com/terms/f/fixedcost.asp

Investopedia. (2013). Variable Cost. Retrieved from

http://www.investopedia.com/terms/v/variablecost.asp

Moodle. (2010). characteristics od supply and demand. Retrieved 2013, from

http://moodle.polytechnic.bh/moodle/mod/resource/view.php?id=4005

MOODLE. (2010). Costing. Retrieved from

http://moodle.polytechnic.bh/moodle/course/view.php?id=213

Yahoo. (2008, Jan 28). How to Calculate the Breakeven Point for Your Business. (K. Hagen, Editor)

Retrieved 2013, from http://voices.yahoo.com/how-calculate-breakeven-point-

business-835979.html?cat=3