BUSINESS POLICY

Cold Storage vs. Knitwear

Case WAC






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. Ajays 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
LAHORE SCHOOL OF ECONOMICS
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.