Fictional case: Willow Market's second location
Compare a second shop, a smaller pop-up, and improving the existing store using opportunity cost and uncertain demand.
Choose whether a retailer should expand now, test a smaller format, or wait, using opportunity cost and clearly stated assumptions.
Overview
Willow Market's owner, Maya, has until Friday to decide whether to open a second shop in a neighboring town. A smaller pop-up space is also available. She could instead spend the next eight weeks improving the original store.
Willow Market, its agreements, and all figures are fictional teaching assumptions.
Recall Lesson 016: Why should a decision compare the benefit of the best alternative use of an owner's time?
The business and the decision
Willow sells ready-made gift baskets to local residents who want a convenient, presentable gift. Customers can use another gift shop, order online, or assemble a gift themselves. Willow competes on a limited selection, dependable availability, and quick collection.
Maya has found a furnished shop and a weekend stall in the neighboring town. Both are available for exactly eight weeks, with no renewal obligation. Any permanent location would require a separate decision. The shop offers more opening hours and space; the stall tests a smaller format with fewer products.
Either expansion would use all Maya's available project time. If she stays at the original store, she can improve its ordering and collection process. Staff can maintain existing service under any option, but nobody else can lead that improvement project.
Maya already paid $900 for drawings of the second shop. That payment is nonrefundable and has no resale or reuse value. She says, “It would be a shame to waste the drawings.”
Costs, sales, and cash
Each gift basket sells for $40. Goods, packaging, and payment processing cost $24 per basket sold. The remaining $40 − $24 = $16 helps cover the option's other expenses. This is the contribution per basket, not total business profit.
| Eight-week estimate | A: Second shop | B: Weekend pop-up |
|---|---|---|
| Additional baskets sold | 600 | 300 |
| Revenue at $40 each | $24,000 | $12,000 |
| Other additional expenses | $8,000 | $2,400 |
The other expenses include all space, fixture rental, setup, and staffing costs. They are nonrefundable and payable before opening. They do not change with sales during the eight weeks. There are no equipment purchases or closing costs.
Option C is to wait on expansion and improve the original store. Maya estimates that project would add $1,800 to eight-week profit after all its additional costs. It requires no payment before customer collections. Treat this estimate as uncertain too.
Maya has $10,000 available after reserving cash for existing obligations. For A and B, customers pay at purchase; suppliers provide goods on terms requiring payment only after the corresponding customer cash arrives. Assume no unsold stock, refunds, other differing costs, or taxes. Existing business results remain unchanged except for the chosen option.
All forecast expansion sales are assumed to be additional to Willow's total sales, rather than purchases moved from the original store. Maya has not verified this assumption.
What Maya knows
In an online poll, 80 people said they would welcome a Willow shop nearby. Nobody placed an order or deposit. The landlord supplied the shop's sales estimate; Maya estimated pop-up sales from foot traffic. Neither forecast has been tested.
The landlord will offer the shop to someone else after Friday. Waiting may lose this particular space. Maya can decline both offers without further payment.
The SBA recommends investigating demand, customer location, competing options, and prices. Those questions help Maya check whether the apparent interest could become purchases. Source
Exercise
Allow 8–10 minutes. Use this template for A and B: additional profit = revenue − (baskets × $24) − other additional expenses.
- Calculate each option's eight-week profit improvement and compare it with C's $1,800. Calculate cash remaining immediately after A's or B's upfront payment.
- Which amount is the opportunity cost of choosing B, using the supplied estimates? Explain how the $900 drawings affect today's choice.
- If B sells only 220 baskets, calculate its profit improvement. How many whole baskets must B sell to exceed C's $1,800, with costs unchanged?
- Recommend A, B, or C in a short memo to Maya. Include the strongest alternative, two assumptions to verify, the principal risk, and a review plan.
Attempt the recommendation before reading on.
Answer
A's additional basket costs are 600 × $24 = $14,400. Its profit improvement is $24,000 − $14,400 − $8,000 = $1,600.
B's basket costs are 300 × $24 = $7,200. Its profit improvement is $12,000 − $7,200 − $2,400 = $2,400. C is estimated to add $1,800. B leads C by $600 and A by $800. These are changes in profit, not Willow's total profit.
After the upfront payment, A leaves $10,000 − $8,000 = $2,000 available; B leaves $10,000 − $2,400 = $7,600. Both fit the supplied cash arrangements. This immediate cash balance differs from the final profit calculation because sales and supplier payments happen later.
The best alternative to B is C at $1,800, so that is B's estimated opportunity cost: the benefit forgone by using Maya's time for the pop-up. Comparing B's $2,400 with C's $1,800 already accounts for it. Do not subtract it again when comparing those options.
The $900 is a sunk cost, a past payment today's choice cannot recover. It remains an expense of the earlier work but does not favor opening the shop now.
At 220 baskets, B adds (220 × $16) − $2,400 = $1,120, which is $680 less than C's estimate. To match C, B needs ($2,400 + $1,800) ÷ $16 = 262.5 baskets. With whole baskets, 263 produces $1,808 and exceeds C by $8. This threshold depends on C's estimate and every cost assumption holding.
Choose B provisionally. It offers the highest estimated profit improvement, a smaller upfront commitment, and a chance to observe purchases in the new town. C is a credible alternative if demand evidence remains weak. Losing the shop is a real consequence, but its availability deadline does not validate the sales forecast.
Check willingness to buy at $40 and whether customers would otherwise purchase at the original store. Ask about actual recent gift purchases and seek paid orders where practical. Have someone other than the landlord review the shop forecast. Poll enthusiasm does not establish purchase frequency or basket spending.
A memo could read: “Maya, choose the eight-week pop-up if a review of demand and supplier terms supports the plan. It is estimated to add $2,400, compared with $1,800 from improving the original store, and requires $2,400 upfront. I would choose the original-store project if demand checks weaken the 300-basket estimate. Track weekly sales, contribution, and any loss of original-store sales; review after week four and before any renewal.”
The principal risk is insufficient additional demand. A week-four review cannot recover the prepaid $2,400, but it can guide merchandising and prevent an unsupported renewal. Eight weeks of weekend sales would not prove that a full-time shop would succeed.
Recall answer: Time used for one project prevents its use elsewhere. An expansion can add profit and still be inferior to the best feasible alternative.
Applying this case
Compare choices over the same period, include the work they displace, and name the assumptions that could reverse the ranking.
Sources
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