Tom Gonzalez, founder of Safety-Plus, expects to spend the next one-half year de
ID: 2819426 • Letter: T
Question
Tom Gonzalez, founder of Safety-Plus, expects to spend the next one-half year developing and testing prototypes for a safety light to be worn by runners. Tom anticipates paying monthly rent of $950 for space in a local warehouse where the safety light will be designed, developed, and tested. Utility expenses for power and heat are estimated at $300 per month. Tom plans to “draw down” a salary of $1,300 per month. Materials needed to build and test an initial prototype product are expected to cost $9,500. In addition, each redesign and new prototype will require an additional $4,500 investment (in other words, the first prototype will cost $9,500 and each additional prototype will cost $4,500). Tom anticipates that before the final safety light is ready for market at the end of six months, the initial plus two more prototypes will need to be built and tested. Costs associated with test marketing the safetly light are estimated at $18,000.
A. Determine the amount of financial capital that Tom Gonzalez will need during the six-months it will take to develop and test market the safety light.
B. What type of financial capital is needed and what are the likely sources of that capital for Tom?
C. What would be your estimate of the amount of financial capital needed if the product development period lasted nine months?(assume that even though it take longer, only three prototypes will be needed).
D. What compensation arrangements would you recommend as he hires additional members of the management team?
Explanation / Answer
A. Calculation of total capital required by Tom
Rent = 950*6 = 5,700
Utility expenses = 300*6 = 1,800
Salary for Tom = 1,300*6 = 7,800
Initial prototype cost = 9,500
Cost of two more prototypes = 4,500*2 = 9,000
Test marketing cost = 18,000
Total Cost = 5700+1800+7800+9500+9000+18000 =$51,800
The amount of financial capital that Tom Gonzalez will need during the six-months it will take to develop and test market the safety light $51,800
B. It can be referred to as start-up capital or seed capital that is required to start a business. The sources of this finance can be from family and friends who know the ability of Tom. Alternatively, this can also be arranged through venture capitalists by showing them the profitability in the business model
C. If the period is 9 months then the cost is as follows:
Rent = 950*9 = 8,550
Utility expenses = 300*9 = 2,700
Salary for Tom = 1,300*9 = 11,700
Initial prototype cost = 9,500
Cost of two more prototypes = 4,500*2 = 9,000
Test marketing cost = 18,000
Total cost =8550+2700+11700+9500+9000+18000 = $59,450
Total financial capital required for nine months is $59,450
D. The compensation arrangements would be to reduce the salary of Tom and introduce additional members. If need be I would recommend that Tom take no salary at all and hire two members with his salary. Since he is product owner, he can stake a claim to the profits after it becomes successful in the market.
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