Cell Gear Case
Julia is in the process of starting her own small business, a cell phone repair and sales sole
proprietorship. Julia has a background in repairing technology, so this career move is a natural step for
her. She is planning to help customers repair their broken phones and perhaps even sell them locally.
For instance, a customer with an older iPhone with a cracked screen could bring the phone into Julia’s
store. Julia would then replace the screen and reset the phone to its original factory settings. After
selling the phone, Julia would pay the iPhone owner a portion of the proceeds, usually between 30% and
50% of the sales price. The customer can also choose to include his or her used phone accessories, such
as cases, earbuds, and Bluetooth speakers in the sale, potentially boosting the sales value.
Julia is also planning on buying broken phones online and selling them after quick repairs. She has
noticed that many damaged recently released high-end phones sell for a fraction of their value, so she is
hoping for some high-margin sales from this approach.
In her first year, Julia is expecting to buy 100 damaged phones online at an average cost of $200 per
phone. She hopes to sell all the phones at an average price of $500. Furthermore, she is expecting to
receive 200 old phones which she expects to sell for an average of $400 (includes sales of accessories).
She estimates that a third of these sales will return 30% of the sales price to the owner, another third
will return 40%, and the final third will return 50%.
On average, Julia expects to spend $100 on supplies for each phone repair. Additionally, she will pay
monthly rent of $1,500 and $200 monthly for utilities. She has also bookmarked $300 per month for
marketing expenses to increase brand awareness.
In her second year (and through her third year), Julia will likely move to a bigger, more visible location
which will support higher sales and more business activity. Although the monthly rent and utilities will
increase by 50%, Julia expects her online and in-person business activity to grow 30% in year 2 and a
further 10% in year 3. To help with more business activity, Julia is planning on hiring a part-time
employee in year 3, whom she will pay $20 an hour (expected monthly salary of $1,000). She expects to
keep the marketing budget at $300 a month for the foreseeable future.
Julia wants to see budgeted annual contribution income statements for the first three years of her new
business. She wants detailed trend analysis and recommendations based on these early projections. She
views her rent, utilities, and marketing expenses as fixed, but everything else as variable (though she
isn’t sure about how salary expense should be treated). She is also interested in seeing cost-volumeprofit graphs for the three budgeted years, with explanations about the similarities and differences. She
feels that some break-even and margin-of-safety analysis would also help.
Julia is wondering if she should monitor how much time and money she spends on each phone repair.
She has roughly budgeted an average repair time of thirty minutes per phone. Based on her last job, she
has her market value bookmarked at $23 per hour. However, she wants to bump that up to $25 per
hour in the second year and beyond. She wonders what the potential impact of spending too much time
on one repair is, as well as the potential impact of consistently spending too much repair time. As an
example, she wants to know what would happen from an analytics, reporting, and business perspective
if her average repair time per phone was forty minutes instead of thirty.
Cell Gear Case
Finally, Julia thinks her savings may be on the low side and she might need some outside financing at
some point. A friend has offered her a $10,000 cash investment in exchange for 10% of after-tax profits
(assume a tax rate of 15%) in the first three years. Alternatively, Julia can borrow $10,000 from the bank
at an annual rate of 6%. She is considering countering her friend’s investment offer for 3% permanent
stake in her business, where she would pay 3% of profits forever. Julia wants a comprehensive pros and
cons analysis of each option, as well as a recommendation on which approach may work best for her
long-term. Also, explain the potential upsides and downsides of simply waiting to borrow money when
the immediate need arises, as opposed to planning potential cash shortfalls in advance and borrowing
early.
Prepare a business report for Julia. Discuss all relevant issues, including pros and cons of each course of
action. Outline any questions/inquiries which should be directed to Julia and why the information is
important to certain decisions.