Overview of the Case Study

Carl Fredrickson’s business is doing well, and he wants to make an informed decision about expanding. Carl has two alternatives for expanding his business capacity: option 1 or option 2. The first choice is to wait and watch, while the second is to expand capacity aggressively.

Carl’s increased yearly sales suggest that his company is doing well. Carl has to expand the business to meet future sales capacity as the enterprise’s sales increase. As a result, Carl Fredrickson should pursue aggressive capacity development for his company. The capacity expansion option would be advantageous because the maximum size of a single 2000 square foot facility is $400,000 per year while the projected sales for Carl’s sandwiches in the coming years is more than $400, 000 per year (Boyer & Verma, 2010). The strategy that the company should adopt is going for an investment that leases its 2000 square foot space with expansion options. It would help the restaurant to expand by opening branches in other parts of the town.

The wait and see approach would mean that Carl will adopt the option of acquiring the maximum capacity of single 2000 square foot facility that might not match the demand of over $400, 000 per year. The approach would then make the company lose its sales per year. The wait-and-see approach that is option one would only make the business to increase its total current capacity by 50%. Aggressive capacity expansion strategy, option two will be beneficial to Carl’s sandwiches because the investment plan will increase the capacity by 100% that will be helpful in the coming years. The capacity expansion option will enable Carl to have less expense on the existing 2000 square feet space and increase their total capacity (Boyer & Verma, 2010). With the minimal expenses, the option will be beneficial in meeting the future demanded quantity of sales.

The answer to question 2:

The strategy of going for opening one fixed-size restaurant and add new restaurants incrementally for expansion decisions is better than expanding 2,000- square-foot space by 2,000 square. Following the forecasted sales for coming years, Carl should open one fixed restaurant that will increase their capacity by 100% of the current capacity of the company. The opening of one set sized restaurant incrementally will make Carl’s sandwiches to achieve its future demanded sales and requirements.

For Carl to expand the company accordingly, he should go with option 2 of one facility. The current trend of the business sales shows that its purchase will double its size in the next seven years and plan for 2000 square foot space for seven years will be a waste of money. Since the sales forecast are made per year, the company should also expand its capacity annually. The company should effect the expansion options if it cannot meet the required quantity of sales for the coming years. Implementation of the plan when it is highly needed will enable the company to earn more net profit.

The answer to question 3:

Risks that are associated with opening one fixed-size restaurant and add new restaurants incrementally include business failure and loss of investment. The changes in environmental factors can alter the forecasted sales of the company that may result in additional expenses in the new setting of the enterprise. The management can minimize or mitigate the challenges for the company to earn the projected profit from sales in the coming years.

Carl can reduce risks associated with his option 2 for expansion by introducing a third party such as insuring their new practices for compensation purposes in case of a loss. The third party insurance will help the company not to suffer a total loss in the event of business failure. Carl can also offer new services to the customers at a time to find out whether there is a variation between the projected sales and the actual sales. Before mitigating or minimizing the risks, he should account for the reasons of reducing such risks. It follows the fact that the mitigation of risks can also cause a decline in its net profit due to additional investment. Answer for question 4:

The Calculated projected net present value for option 2.

Year

Forecast sales

Option 2 investment

0

$280,000

$300,000

1

$350,000

$300,000

2

$420,000

$300,000

3

$490,000

$300,000

4

$550,000

$300,000

5

$600,000

$300,000

6

$645,000

$300,000

7

$695,000

$300,000

Total

$4,030,000

$2,400,000

Cost of labour and other utilities = 40%

Food cost = 30%

Total costs = cost of labour and utilities + cost of food

That is 40% + 30% = 70%

The cost of capital is 15% and can be used to calculate the projected net present value of option 2 investment.

The formula for NPV is:

Net Present Value = (projected cash inflows from investment) – (cash outflows or costs of investment)

Where NPV = (4, 030, 000- 2, 400, 000)

= $1, 630, 000.

Reference

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Boyer, K. K., & Verma, R. (2010). Operations & supply chain management for the 21st century. Mason, Ohio: South-Western/Cengage Learning.

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