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Analyse the arguments for First Cars car club proposal. June 2010 AQA

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Introduction

The arguments in favour of the car club include the forecast profitability of the new proposal. The ARR of 15% is above the rate set by the Directors and this will help First Cars become more profitable and cover the heavy investment of £8m that the proposal requires. However this figure was based on forecasted cash flows which might be inaccurate because First Cars has never tried a car club scheme before. The location is another advantage. A prestigious location in London will attract a different kind of clientele allowing the business to keep prices high and therefore receive higher revenue. ...read more.

Middle

On the other hand the arguments against this proposal include the high fixed costs such as the large training budget (rising from £30000 to £400000). These higher fixed costs will lead to a high break-even point and means that the company will only start making a profit after a long period of time. As the company already has a weak financial position this could be a crucial disadvantage. Staff salaries are also forecast to increase. Although these might lead to higher motivation it raises the labour costs of the business. First Cars might not be able to afford to employ all of the workers that they will need. ...read more.

Conclusion

This strategy of market development (same product but new market) is not as risky as diversification but should be more profitable than trying to penetrate the car hire market further. Although First Cars may have to wait for several years before the proposal becomes profitable there is scope for a successful result, especially as the costs of running a car are forecast to increase which should raise demand for car clubs. The main factor which will influence success is whether the business, managers and workers can change their culture from a low price low customer service business into a high price and high customer service one. If they can do this then I think the car club will be successful and I recommend that First Cars goes ahead with it. ...read more.

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