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Should A.W. Thompson accept a new order when operating at full capacity?

Extracts from this document...

Introduction

Should A.W. Thompson accept a new order when operating at full capacity? 1. Background 1.1 A.W. Thompson supplies and installs relocatable partitioning systems, dry-lining, and suspendable ceilings. It started ten years ago; there was no initial capital injection. It is a typical soletrader, in which the owner is in control of all sides of the business. Over the years the business has expanded with jobs being taken nationally, principally through a contractor- Unite. (See appendix 1) 1.2 The majority of jobs involve private organisations, such as university accommodation and offices, but markets also include the public sector such as police headquarters and schools. 2. Aims and Objectives 2.1 The business is currently running at full capacity with jobs being undertaken in Portsmouth and Bristol. The Company through which A.W. Thompson gets the majority of their jobs -UNITE, have offered them an additional, large job in Edinburgh, Scotland. 2.2 The intention of the project is to investigate the current position of A.W. Thompson and use this information to analyse as to whether the job in Edinburgh should be accepted or rejected. 3. Primary Objectives * To analyse available data to assess the feasibility of the proposed additional work * To fully justify the recommendations. 4. Secondary Objectives Secondary objectives are identified in order to achieve the primary objectives. They are as follows. * To organise a meeting with the owner to enable any questions needed for the investigation to be answered and the background surrounding the business to be obtained. It will also enable figures to be gathered. * To obtain relevant information from the profit and loss accounts, balance sheets and cash flow forecasts. * To assess the viability of accepting the additional job. * To analyse the figures to see how the capacity of the firm has grown, and what effect the additional job might have on the firm. * To ascertain whether there is a need for the business to expand, in order to take on a greater number of jobs. ...read more.

Middle

In 1971, the Bolton Report was published. The report indicated that a small business has three essential characteristics: 1. It is managed by its owner(s) in a very personalised way. 2. In economic terms it has a relatively small share of the market. 3. The owner is free from outside control in his or her principal decisions and the business is independent in that it does not form any part of a larger enterprise. 10.2 The Bolton Report also provided more specific measures of a 'small business' based upon the type of industry in which the business operates. The construction industry must have 25 employees or less. 10.3 All the above apply to A.W. Thompson, and it can therefore be classified as a small business. 10.4 Economic theory suggests that large firms should be more efficient than small firms due to the existence of economies of scale. 10.5 Despite this small firms including A.W. Thompson continue to survive for the following reasons. * Small businesses can supply a small niche market. For example the niche market of supplying and installing relocatable partitioning systems, dry-lining, and suspendable ceilings. * They can provide a personal or more flexible service. For example, A.W.Thompson has established a high degree of brand loyalty with a larger contractor. * The owner can often gain a high degree of self-fulfilment from their work and are therefore often highly dedicated. 10.6 However, there are also reasons why A.W.Thompson, like other small businesses might wish to grow. After all, growth is one of the three prime organisational objectives. * Cost saving - firms can benefit from economies of scale, and reduced actual fixed costs * Diversification of product - reduces the risk of dependence on one product or service. * Diversification of market - reduces dependence on one economy and on set of customers. * Market power - increased power in the market allows firms to influence prices and to obtain better margins through reduced competition. ...read more.

Conclusion

It can be seen from the cash flow forecast that it would primarily increase the businesses cash flow position by an estimated �61,372.50. However, other benefits include the maintenance of the goodwill and the loyalty of the larger company, UNITE providing added security for the future and providing an added �50,000 on the balance sheet in terms of an increase of fixed, intangible assets. It can be seen from the breakeven analysis as well, that the risk associated with taking on the extra job is minimal, as at no point with the additional job does total costs exceed total revenue, even though fixed costs actually exceed by �22,000. The added fixed costs are that in order to cope with the extra capacity by taking on an additional manager, needed to take on the additional job. This not only allows A.W. Thompson to accept the contract, but also increases their flexibility and capacity generally for the future. The only doubt however with this strategy, is the fact it has not been done before and the business has no experience of hiring staff at such a high level. The quality of the new staff is therefore a vital component as to whether the additional job will be a success. There is no certainty, and therefore the owner may still be reluctant to take on the job, even though the majority of evidence suggests it should be taken on. However, it can be seen that it might be essential to the business to take on the job because as suggested in "The External Environment", if the economy takes a downturn, the effects A.W. Thompson will be highly detrimental. The service and products A.W. Thompson offers are of an income elastic nature as found by previous back-data. This means that although the estimated GDP growth for 2002 only decreases by 0.3%, it is estimated that it will bring about a 1.035% decrease in sales. Therefore, while A.W. Thompson has the chance, it should increase its revenue, so it will be able to compensate for the possible decrease in sales for the projected year. 1 ...read more.

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