Business policy

Cold Storage vs. Knitwear

Case WAC

LAHORE SCHOOL OF ECONOMICS

Ajay and Durgesh studied together till 12th standards and then did M. Com and B. Tech

respectively before joining MBA together. During their degree they interned in different

industries so at to get maximum exposure and to gain practical experience. Both came from

business oriented families. Ajay’s family was in retailing of textiles while Durgesh came from

agriculture based family. After their internship they looked for the prospects of doing a business

jointly as they knew each other for a very long time. Ajay was interested in entering knitwear

industry while Durgesh was interested in setting up a Cold storage. Their families were happy for

their children to starting up a business together and offered them 10 Lakhs each to start up a

business which makes 20 Lakhs in total. In their final project of MBA they made a feasibility

report on their respectively chosen industry and business.

Profile of Ajay

Belonged to a small town of Eastern UP

B.com in a post graduate college

M.com

MBA

Joined a textile company for his summer training at Delhi

Profile of Durgesh

Belonged to a small town of Eastern UP

B. Tech with specialization in mechanical engineering

MBA

Joined an engineering company for his summer training at Delhi

Facts:

Cold Storage:

Cold storage required 2,800,000 of own funds and 2,500,000 Loans to start up the business as the

total cost of project is 5,300,000 as mentioned in the report. Total cost structure suggests that the

costs they will incur during the business would be 2,582,500 per annum and the revenue

generated for the project would be 3,450,000 per annum. Keeping in mind all these costs and

revenue the total profit before tax for this business would be 867,500 per annum and return on

capital before tax would be 31% for running on full capacity.

Knitwear:

As far as the Knitwear is concerned Knitwear required 2500,000 of own funds and 20,45000

Loans to start up the business as the total cost of project is 4545000 as mentioned in the report.

Total cost structure suggests that the costs they will incur during the business would be 92,91000

per annum. Keeping in mind all these costs and revenue the total profit before tax for this

business would be 2809000 per annum and return on capital before tax would be 112% for

running on full capacity.

Major Problem:

The major problem was to choose between setting up a cold storage or knitwear setup.

As they collectively had only 20Lacks to start up a business they had to decide which business is

feasibly for them. They made feasibility reports on their business in which they were interested

respectively. Decision had to be made which business to be chosen both businesses had their

pros and cons.

As per the costs are concerned they are comparatively less for the Knitwear business. Though the

case mentions that Knitwear industry is highly competitive and lot of promotional activities and

efforts would be required to maintain the competitiveness of the business. Also the promoters

will have to manage the production and marketing side together which will be a difficult task. On

the other hand the Cold Storage facility says that there are no prospects of expansion though the

managerial problems would be low if the entire storage was used.

As per the return on their investments there is a significant difference between the both, Cold

storage has 31% and Knitwear has 112%. But the promotional costs associated with the

Knitwear are very high.

Sales are at the heart of the company, if there are no sales then no profits and no expansion.

Despite the high costs associated with the Knitwear, expansion is possible and the return on the

investment can be very high despite a little delay in in recovering the investment. Even if more

capital is required in the initial years but it will eventually pay back in the long term. Therefore

they should go with the Knitwear business.