AB Ltd., manufacturing light bulbs decided to start manufacturing of ceiling fans. They formed a sister concern by the name Cool Air Ltd. The new company was in need of some investment and for the same they had approached a bank. They had submitted a business plan to the bank stating all the necessary details. They had mentioned very clearly in the plan that they will be manufacturing the blades and have decided to outsource the required motor parts. The plan spoke about the reason for outsourcing along with the contracts with subcontractors. (a) Explain the Component of the business plan along with its related sub part. (b) The business plan further gave details about the money which will be invested by the owners and how much they are expecting to borrow. Identify and explain the component and its element.

Question

Accepted Answer

(a) Production Plan — Partial Manufacturing: When some manufacturing is subcontracted or outsourced, the plan should describe the name and location of the subcontractors, reasons for their selection, the cost and time involved, and any completed contracts. In the case of Cool Air Ltd., the blades are manufactured in-house while the motor parts are outsourced, so the plan must clearly state what is done internally and what is outsourced.
(b) Financial Plan — Proforma Financing Decisions: This element summarizes the projected sources of funds, i.e., owner's funds and borrowed funds. The entrepreneur selects the best overall mix of financing to minimise capital cost and financial risk, and maximise return on investment and profitability.