Hey everyone! It's me Shouq. This is a project for an Industrial Engineering class called Engineering Ecocomics - IE343 which I took in Spring 2018 in the American University of the Middle East (AUM) in Kuwait.
Abstract
In this project, we are going to manage Hon
Company in the best economical way possible. Also, the problems regarding the
compound interest as well as the annual cash flow and the rate of return will
be solved. In addition to that, a benefit-cost ratio analysis will be performed
in order for us to measure and evaluate all possible alternatives. Then
analytical decisions will be made. Finally, the data will be analyzed using
Microsoft Excel.
Keywords: cost, revenue, company, structure, company.
Introduction
Hon Company is an online library that
provides books in several languages. The books that Hon Company provides are
PDF books as the cost of PDF books will be way cheaper that regular books. Hon Company
has a website that shoews the great range of PDF books that they provide. This
website can be accessed from countries all over the world which means that the
company is an international company and offers its services to everyone and not
just people in Kuwait as the company is based on Kuwait.
The hidden meaning behind the name of the
company is a Japanese word. 本, pounced as Hon, is a Japanese word that means "book". And as
the company works with books, we thought choosing this word as the name of the
company will make it unique and give it more publicity. Also, the company
recognizes the importance of advertisement, and that is why Hon Company spends
a constant amount of money monthly on advertisement.
Hon Company has an office that is based in
Kuwait. It has an office located in Salmiya Area. In the company, there are
several employees where one of them is the owner and the CEO of the company.
The other workers are programmers, techniques, It employees, HR employees, and
the secretaries that do all the needed paper work of the company as well as
assisting the CEO.
For every single book the company sells the
authors and the publishers of the book get specific percentage of the book's
price on the Hon website.
The
added value
The number of people who are starting to
prefer buying books online nowadays has increased compared to people preferring
to go to the library. There are several apps and websites that display books in
many different unique ways that are preferable to the customer.
We wanted to create a business that helps
people to develop and improves themselves and their knowledge through reading.
We searched for a way that will suit people who cannot buy books and the ones
who do not want to buy and own books because either do not read it for more
than once or do not have storage at home for the books they buy. Because of all
of that they will either store the books all over the place or distribute it to
everyone they know. Nowadays, the key for success in any field is to be unique
by offers something in a different way than the regular common way. The unique
ways of offering something will attract the largest number of customers.
To achieve that, we found out that providing
PDF copies of books as well as providing books in several languages in a
cheaper price than the original books will be the best solution. It is going to
be useful and beneficial for both parties. As a result, larger amount of people
will be able to buy from our Hon Company. That will help customers to save the
money and increases the company's profit at the same time. Also, it will help
in saving time and effort for both the customers and the sellers
Moreover, there will not be any need for
storage for the books. The books are going to be available for everyone at any
time. It means that customers will not wait long time until the books are
delivered as everything is happening online and by the speed of light. As a
result, it will insure that the customers are satisfied by the fast services
and it will affect the profit positively. There will not be any use for the
papers in order to make PDF book copies which indicate that the Hon Company is
environmental friendly in an indirect way as tress will not be cut to produce
books.
Despite the fact that the prices will suit the
customers which will increase the profit, we also care about the individual’s
knowledge and encourage them to improve themselves through reading. In our
opinion, this is the main reason that makes our company attractive and
preferable choice for the many customers.
Also, if the customer would like to have the
actual book shipped out to their own place, the company gives this as a
possible option for regular customers as a way of rewarding them for being
loyal to the company.
The structure
Work breakdown structure, known as WBS, is a way used to organize
different parts of the company into manageable departments. It defines and
shows, visually, every single department regarding the company as well as the
sub department or the department's function and work. All of these parts of the
company will be called level as where Level 1 will be the company itself where
it gets divided into main departments or functions that will be called Level 2.
Under Level 2 we will see Level 3 where things are mentioned with more specific
details and so on.
Costs
In order to
start any business in any field, we must follow some important steps to prevent
any problems or difficulties in the future. Therefore, when we face any problem
we will be able to deal with in order to solve it or at least reduce its
effects. All of this will increase the opportunity to make Hon Company succeed.
First of all, we need to search for expertise in the field to benefit from
their knowledge and experience. After that, we must consult all professional
people who are related to our business such as lawyers, programmers, engineers,
designers, and the accountants to cover all the relevant aspects to be in the
safe side. Then, we will list all the expected costs to calculate the needed
amount of money for the initial, monthly, and annual budget. Calculating the
costs will help us to avoid any financial problems that might lead us to fail.
Therefore, determining the needed money for each part from the beginning will
increase our profit since we will not waste money for any unexpected and
unneeded costs.
As mentioned
above there are many different types of costs. The costs in general are divided
into two different types which are fixed cost and variable cost where every one
of these types has many sub parts under it.
Variable Costs
1.
The initial cost: The Hon Company has several initial costs that were a result of
starting a business. These initial costs are:
·
Consultants: In order for
us to start a successful company, we will consult many professional people like
lawyer, accountant, programmers and IT, decoration designer, and security guard
of the company. In estimation the budget for consultants is approximately
around 5,500 KD.
·
Licenses
and legal work: In order for anyone to start a business, permission from the
government is needed to be able open and start managing the company legally. Having
licenses will protect our rights in the future if any problem occurred.
Also, it will authorize and officialize the business. It will cost around 3,500
KD
·
Location
and Suitable Office: Having an office in a good location is very important for any
business. Also, having a suitable work environment and office are very
important as well. It also includes office's furniture, decoration, and equipment
as well. All of this will cost 10,000 KD to provide a comfortable and relaxing
work environment since employees will spend almost all their working hours in
front of the computer screen at their offices.
·
New
high quality devices: Having good quality computers, telephones, Televisions, and
display screens is important and essential for a company's success. Having new
high quality devices will cost 9,500 KD to provide a good quality equipment for
employees
·
Site
design: Site design includes logo, front page, features, categories,
general information, contacts information, and address with the location. All
of this is important for the company's success as well. That will cost around 5,850
KD to insure that the website is professional, unique, clear, and easy to
access. All of this shows how we care about all details regarding the business
as well as the importance of satisfying the customers' needs which will help in
attracting more customers.
·
Security
system: Without a security system the company will be hacked or even
stolen. Having a security system could include surveillance cameras and
protection programs as well. All of this will cost the company 5,750 KD.
Everyone knows the importance of having a security system, and we want to
provide the best security service for our customers.
The total initial variable cost is equal to 40,100 KD.
2.
The monthly cost The Hon Company has several monthly costs that were a result of
starting a business. These monthly variable costs are:
·
Maintenance
is an important part of keeping a company to work efficiently. The
maintenance includes the maintenance of computers, electricity, and air
conditions. It costs 100KD/month.
·
Water
and electricity bills which the company has to pay for the government. On average it
might cost around 100KD/month.
·
Delivery
for special clients is an extra feature we give for loyal customers who have been
having a membership with us for several years now. It costs between 20KD and
80KD per month.
The total monthly variable cost is equal to 250KD on average.
3.
The annual cost: The Hon Company has several annual costs that were a result of
starting a business. These annual variable costs are:
·
Renewal
contracts: the amount of money spent on renewal contracts on a year increases
or decreases based on the profit of the sold books. Renewal contracts cost on
average between 1000KD/year for each publishing company.
·
Renewal
protection system: to protect our website in general and our products (books) and database
in specific we needed to make renewal of product systems which costs 500KD/year.
·
Traveling
expenses: as employees need to go to meet publishing companies from all over
the world to contract with them in order to sell their books in the Hon Company
website, the company itself has to cover all of these travelling expenses.
These travelling expenses include air plane tickets, hotels reservations, meeting
(in restaurants or any other meeting places). All of this costs 1000KD/month on
average.
The total annual variable cost is equal to 2500KD on average.
Fixed Costs
1.
The monthly cost: The Hon
Company has several monthly costs that were a result of starting a business.
These monthly fixed costs are:
·
Rent
as we are renting a location for the company were the offices are.
The rent cost is 500KD/month.
·
Internet
connection for the company costs 50 KD/month.
·
Salaries
for the employees of Hon Company. The salaries cost for employee is
shown in the table below.
Employee's job
|
Salary
|
CEO
|
10000 KD
|
Manager
|
700KD
|
Accountant
|
700KD
|
Lawyer
|
700KD
|
Programmer
|
700KD
|
IT employee
|
700KD
|
Website designer
|
500KD
|
Marketing director
|
500KD
|
Administrator
|
150KD
|
Janitor
|
50KD
|
|
The total cost of salaries for all the 10 employees of Hon Company in every single month will be equal to 5,700KD/month. And the total monthly fixed cost is equal to 6250KD.
2.
The annual cost: The Hon Company
has several annual costs that were a result of starting a business. These annual
fixed costs are:
·
Office
insurance from breaking, stealing, hacking, and fire. The costs of the
insurance is 500KD/year
·
Health
insurance for the Hon Company employees.
The cost of the
health insurance = the number of employees* 50KD/year = 10*50= 500KD/year
·
Renewal
security equipment includes smoke detector system, and fire extinguishers, and
the cost of that is 50KD/year.
·
Bonus
is a way to encourage employees and reward them for their hard work. It will
cost 500KD/year for the most effective employee in the company during the year.
·
Advertising
and marketing is very essential to introduce our company to the public in order
to attract larger amount of customers. Advertising and marketing cost
1000KD/year as it takes an important role for the business to spread
everywhere.
the total annual fixed cost is equal to 4050KD.
Regarding the Disposal as the
company is considered to be environmentally friendly; it has no disposal
because it has no waste or anything as they sell PDF books.
From Table 2 we can see the monthly costs of internet, rent, and salaries which are fixed costs are calculated monthly.
From Table 3 we can see all Hon Company’s employees' salaries based on their position in the company. All of this is calculated monthly.
From Table 2 we can see the monthly costs of internet, rent, and salaries which are fixed costs are calculated monthly.
From Table 3 we can see all Hon Company’s employees' salaries based on their position in the company. All of this is calculated monthly.
From Table 4 we
can see the monthly costs of maintenance, bills, and special clients' delivery
in 2012 during the 12 months of the year and the total costs as well. These
monthly costs are considered to be variable cost.
As a result,
the total of the fixed monthly cost of the internet, rent and salaries cost for
five years from 2012 until 2017 is equal to 465000 KD as seen in Table 5.
As a result, the total monthly variable cost of maintenance, bills and special clients' delivery for 5 years from 2012 until 2017 is equal to 25,300 KD as seen in Table 6.
Cost structure
Cost structure
is a way used to organize and manage all costs inside an institute or a
company. It defines and shows, visually, all costs regarding the Hon Company as
well as the sub costs if needed. All of these types of costs of the Hon Company
will be called levels as where Level 1 will be the cost itself where it gets
divided into two costs which are fixed cost as well variable cost will be
called Level 2. Under Level 2 we will see Level 3 which includes the sub-parts
under variable and fixed cost. Under Level 3 comes level 4 where things are
mentioned with more specific details and so on if needed.
Revenue
Any
business’s target or aim is to get the maximum profit or the least loss. To
reach that goal in our business, we are trying to get as much revenue as we can
through a list. The revenue refers to the income that a company received from
any business. Revenues based on sales and market values are important to a company as well.
In
Hon Company, we have different types and categories of products that are being
sold. The first type has 20 books while the second type has 30 books, and the
last type has 50 types as seen in Table 7. Each one of those type has a
different price. The quantity of the books being bought by a person depends on
the costumers themselves.
Books type one
|
Books type two
|
Books type three
|
|
Quantity
|
20
books
|
30
books
|
50
types
|
Price
|
2
KD / Book
|
3
KD / Book
|
2
KD / Book
|
|
An
example for the revenue based on sales is if a customer bought a book
from the first type, it will cost is 2KD per book. Moreover, if a customer
bought a book from the second type, the price will be 3KD per a book. As a
result, X refers to the price depending on the type of books that the customers
chose. In addition, 10% of that price goes to the publisher and author of the
book. In our business Hon Company, we offer 100 books of 3 different categories
to please as much customers as we can. The 100 books stand for the quantity.
Therefore, the revenue is the price multiplied by the quantity times the price.
Revenue
= Price * Quantity
R
= P * Q
There
are many different types of revenue accounts. Some of these revenue accounts
are:
1. Service
Revenue is the revenue earned from
rendering services. Other account titles may be used depending on the industry
of the business.
2.
Sales as revenue from selling goods to customers. It
is the principal revenue account of merchandising and manufacturing companies ("List of Revenue Accounts - AccountingVerse", 2016).
3.
Sales Discounts is a contra-revenue account that represents
reduction in the amount paid by customers for early payment. It is shown in the
income statement as a deduction to Sales ("List of
Revenue Accounts - AccountingVerse", 2016).
4.
Sales Returns
and Allowances is also a
contra-revenue account and therefore shown as a deduction to Sales. Sales
return occurs when there is actual return of a defective item. Sales allowance
happens when the customer is willing to keep the item with a reduction in its
selling price ("List of Revenue Accounts -
AccountingVerse", 2016).
5. Rent
Income is earned from leasing out
commercial spaces such as office space, stalls, booths, apartments,
condominiums, etc.
6. Interest
Income is the revenue earned from lending
money.
7. Commission
Income is the revenue earned by brokers
and sales agents.
8. Royalty
Income is earned by the owner of a
property, patent, or copyrighted work for allowing others to use such in
generating revenue.
9. Franchise
Fee is earned by a franchisor in a
franchise agreement.
In the income statement, net income
is computed by deducting all expenses from all revenues. Revenues are presented
at the top part of the income statement before the expenses.
Net income = all expenses - all
revenues
So as seen in Table 7 there are 8,400
books of type one where the price of one book is 2KD while in book of type 2
there are 8,400 books and the price per a book is 3 KD. Finally, a book of type
3's price is 5 KD, and there are 8,400 different books of type 3 in The Hon
Company. The revenue of selling all books in all of the three types will be
·
Revenue = Price * Quantity
·
Total revenue = (Price of books of type one *
Quantity of books of type 1) + (Price of books of type two * Quantity of books
of type 2) + (Price of books of type three * Quantity of books of type 3)
·
Total revenue = (2 *8,400) + (3 *8,400) + (5*8,400)
·
Total revenue = (16,800) + (25,200) + (42,000)
·
Total revenue = 84,000 KD per year
Revenue structure
Revenue
structure is a way used to organize and manage all costs inside an institute or
a company. It defines and shows, visually, all revenues regarding the Hon
Company as well as the sub revenues if needed. All of these types of revenues
of the Hon Company will be called levels as which is Level 1.
Sensitivity
To continue the
sensitivity of our business, we create a spider plot. From the previous results
we estimated the following measurements: From above, we know that the
initial cost is equal to 40,100 KD which is considered to be the inventory. We
also know that the total revenue per year is equal to 84,000 KD which we will
consider to be annual saving. On the other hand, regarding the annual expenses,
it will be the summation of all variable and fixed costs per year which is
equal to 77,950 KD per year. Not to mention that we considered the minimum
acceptable rate of return (MARR) to be 5% this is commonly used in Kuwait in
many banks. Also, as we are selling books, usually books have a lifetime of 10
years. All of that can be seen in Table 8 below.
It was required
form us analyze the sensitivity of the present worth (PW) of the company over a
range of -20% until +20% changes of the capital investment, annual saving,
annual expenses, and minimum rate of return (MARR) as well. The values of the
factors that we are using to find present worth (PW) using excel are the ones
in Table 8. From that table, we draw a second table which you can see in Table
9 below.
|
|
In order for us
to fill in the table, we used formulas. Regarding the value of the first cell
in the capital investment column, it will follow the formula of = –I*(1+ the
percent change of the factor which is -20%) + PV(MARR's cell; Life Time's cell;
-(Annual Saving's cell – Annual expenses' cell). We notice that the inventory is negative as
expected as it is a loss. Also, in order for us to be able to ably the same
rule for all the column and get a result, we will use the dollar sign near the
inventory's cell, the MARR's cell, the Life Time's cell, Annual Saving's cell
as well as the Annual expenses' cell. The dollar sign near a cell's number
indicates that the value will not change. Then, we can simply drag the rule
down for the column as a whole to get the rest of the calculations. So the
final rule with cell's number will be
=-$D$13*(1+A2)+PV($D$17;$D$16;-($D$14-$D$15))
While regarding
the value of the first cell in the annual saving column, it will follow the
formula of = –I + PV(MARR's cell; Life Time's cell; -(Annual Saving's cell*(1+
the percent change of the factor which is -20%) – Annual expenses' cell). Also,
in order for us to be able to ably the same rule for all the column and get a
result, we will use the dollar sign near the inventory's cell, the MARR's cell,
the Life Time's cell, Annual Saving's cell as well as the Annual expenses'
cell. The dollar sign near a cell's number indicates that the value will not
change. Then, we can simply drag the rule down for the column as a whole to get
the rest of the calculations. So the final rule with cell's number will be
=-$D$13+PV($D$17;$D$16;-($D$14*(1+A2)-$D$15))
On the other
hand, the value of the first cell in the annual expenses column will follow the
formula of = –I + PV(MARR's cell; Life Time's cell; -(Annual Saving's cell–
Annual expenses' cell*(1+ the percent change of the factor which is -20%)). Also,
in order for us to be able to ably the same rule for all the column and get a
result, we will use the dollar sign near the inventory's cell, the MARR's cell,
the Life Time's cell, Annual Saving's cell as well as the Annual expenses'
cell. The dollar sign near a cell's number indicates that the value will not
change. Then, we can simply drag the rule down for the column as a whole to get
the rest of the calculations. So the final rule with cell's number will be
=-$D$13+PV($D$17;$D$16;-($D$14-$D$15*(1+A2)))
While regarding
the value of the first cell in the annual expenses column, it will follow the
formula of = –I + PV(MARR's cell*(1+ the percent change of the factor which is
-20%); Life Time's cell; -(Annual Saving's cell– Annual expenses' cell). Also,
in order for us to be able to ably the same rule for all the column and get a
result, we will use the dollar sign near the inventory's cell, the MARR's cell,
the Life Time's cell, Annual Saving's cell as well as the Annual expenses'
cell. The dollar sign near a cell's number indicates that the value will not
change. Then, we can simply drag the rule down for the column as a whole to get
the rest of the calculations. So the final rule with cell's number will be
=-$D$13+PV($D$17*(1+A2);$D$16;-($D$14-$D$15))
After that, we
observed the resultant table and noticed that the capital investment is
decreasing as the percentage change increases. Also, the annual expenses and
MARR are decreasing. Not to mention that the annual expenses would even reach
negative values. On the other hand, the annual saving is increasing in a
continuously without any loosing and show that the profit will start from the 0%.
In Figure 4 we can see the spider plot of Table 9. Spider plot is a way used to show the result conducted by the sensitivity analysis (Subramanian, 2011).
Internal Rate of Return
In order for us
to know if this project is a good project or not, we will have to find the
Internal Rate of Return (IRR). In order for us to find the Internal Rate of
Return (IRR) using Excel, we will have to draw a new table which has number of
years that is equal to the useful life time of a book which is mentioned above
to be 10 years. Then under these years, we subtracted the annual saving from
the annual expenses, and got a result that is equal to 6,050 KD. We used an
Excel feature to find the Internal Rate of Return (IRR) which is
=IRR(Investment's cell graded till the 10th year's cell of annual
saving – annual expenses)
We got a value of the Internal Rate
of Return (IRR) that is equal to 8%. Comparing the
value of the Internal Rate
of Return (IRR) which is equal to 8% to the minimum acceptable rate of return (MARR)
which is equal to 5%, we notice that the IRR is greater than
the MARR which indicates that this company has a good project which means that
we can actually find investment for financing this project and company.
Breakeven
Doing the breakeven will help us in knowing what is the quantity of
books that we need to sell before we even start to make revenue.
PW= - I + (R - E) * (P/A, i%, N)
PW= 0 = - I + (R - E) * (P/A, i%, N)
PW= 0 = - I + ((Q*P)- E) * (P/A, i%, N)
PW= 0 = - 40,100KD + ( (Q*10)- 77,950 ) * (P/A,
5%, 10)
0 = - 40,100KD + ( (Q*10)- 77,950 ) * (
7.7217 )
Q = 8,314 books
From the
calculation above, in order for us to know the number of quantity we need to
sell before we get any profit, we equalized the present worth with zero, and
the quantity was 8,314 books to sell before we make any profit or revenue in
the company.
Work Plan
Managing and organization the work plan
increase the chances of having the work done successfully in time. In the Gantt
chart seen in Appendix A we notice that the work plan is divided by
deliverables where in every single deliverable we noticed that all needed steps
are mentioned.
Also in Table 1, we notice that the plan for
this week is mentioned where we are trying to manage our time and work
together. It is shown that we have a meeting to discuss the work progress for
two hours on Wednesday from 11 am until 1 pm. Also, we have another meeting for
three hours in Monday from 1 pm until 4 pm. Not to mention that group members
are working throughout the week on the project in order for it to get the best
outcome at the end. Group members will also go to the professor's office to
discuss the project and make sure of their understanding of the project
requirement. On Friday from 10 am until 12 pm we notice that it is a dark black
spot which indicates it is a rest time where no messages or calls are being
done. Taking rests is a good thing as it motivates people to work harder
afterwards. Finally, on Saturday between 2 pm until 4 pm the work will be
submitted on Model.
Future work
We have many future ideas and dreams regarding
our company. Converting the Hon Company into a smart phone application instead
of a website is our main aim for the future. The website suits us since we have
just started the business, but in order for the company to reach more people,
we are ambitious to have our own app. That will show the number of people who
downloaded the application, and people's rate and opinions on the Hon Company
as well as new ideas and suggestion in how to improve the company and gain
costumer's satisfaction. We will make sure that it will available for all
devices in all over the world. The access for the application will be free to
ensure that everyone is going to get the chance to visit it without any
pressure or commitment. There will be a discussion bar under each book page
which is considered available for visitors as a form of encouragement to join
the Hon Company and sign up for a membership. In addition to that it will
insure that customers will get a full idea about any information they need
regarding the book they are thinking of ordering.
Another aim for the future that Hon Company has
is to provide different categories of books for different ages and in many
different languages as having collaboration with several international
publishers by signing contracts with them will push Hon Company to the top
compared to other companies that work in the same filed. Therefore, Hon Company
will be known for its great quality and amazing peculiarity.
A third aim that the company have is providing
audio books for the people with disabilities that prevents them from being able
to read themselves as well as the ones who prefer to hear books rather than
reading it themselves.
We will depend on advertisement to show the
main idea and the basic information related to the Hon Company in order to
attract customers from all over the world to sign up. At the end, nothing will
happen without a hard work and fully commitment until the end in order to reach
success which will not really happen without hiring amazing creative people who
will help this company to reaches the top.
Conclusion
To conclude, in this report we wrote an introduction regarding the
company that we are going to analyze. After that we mentioned all the costs
that the Hon Company has to go through as well as all the revenues they get to
make. Also, we made the cost and revenue structure of the Hon Company.
We also made a work plan that will contribute on the progress of
the project to go smoothly as well as a future plan for the company.
In addition to that, we found the sensitivity analysis as well as
the Interest Rate of Return (IRR). In conclusion, we found out that this
company is a good company to invest in.
References
List of Revenue Accounts - AccountingVerse. (2016). Accounting Verse.
Retrieved 7 April 2018, from http://www.accountingverse.com/financial-accounting/elements/revenue-accounts.html
Subramanian, M. (2011). Sensitivity Analysis. Retrieved from http://www.msubbu.in/ln/economics/Eco-Lecture-06-SensitivityAnalysis.pdf
Appendix
The students who worked in this project are
- Shouq Alansari
- Hessah Salman
- Aleyah Almeea
Knowing that all students in the group have worked ''enough'', but not all students have put equal amount of efforts while working on this project. Some students worked harder than others, and it is normal when it comes to working on groups. Great thanks to Hessah Salman for working extra hard during this semester and this project included. Many thanks Hessah and your hard work is appreciated.