Essay: Avoiding Risk and using Market Research Analysis

Sample Essay

To avoid investment risks Tesco will design its capital size both on equity and debts. The total capital requirement for the company is approximately £900,000, sixty percent of which will be acquired through debts from the company’s line of credit from a commercial bank.

Out of this £900,000, three hundred thousand pounds will be invested in the government bonds with a return of 5 percent per annum. The cost debt will be aimed at 2.5 to 3 percent from the company’s bank line of credit (Walayat 2011). So the return from the risk-free investment will be recorded as other income in the income statement. This investment may also be used for future diversifications.Tesco uses periodical costing and an inventory system on a last-in-first-out basis. Initially, the gross profit margin for the company is kept at 90 percent of the total per unit cost, inclusive of 40 percent overhead costs for transportation, fuel, fluctuation in the cost of raw materials, inflation etc (Matz, Usry 7th Edition). The sales of sausages depend heavily on seasonal changes as in winter and autumn the demand for beef sausages increases. Assuming the cost to remain constant over the period of one year, the sales volume would see an upward trend in the third quarter with an overall increase in demand by fifteen percent and thirty percent in the following quarter as compared to a ten percent decline in sales in second quarter. The sales tax would remain twenty percent for the year (TMF 2010).

The quantity sales depend on the product category and usage. Using the market research analysis the units demand each product is set and priced on the basis o cost-volume-profit-analysis. The more our sales increase the greater would be our variable cost. The cost and price have a direct relationship with respect to profit. Tesco keeps its profit margin below hundred percent in the first year. The operating expenses for the company are projected on the basis of three approaches: budgeted, optimistic and pessimist.

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