Coping with Global Trend Using The Example of Victoria Kite Company - Case Study Example

Victoria Kite Company Introduction: Coping with Global Trend More intense rivalry among competitors, technological innovation, and the rapid integration of markets to become a single global village primarily spurred developments in the operations of business organizations. These factors created multi-faceted changes in the different functional areas of companies especially in the way they manufacture the products and commodities they offer to customers. In coping with this changes and challenges in the global arena, companies are revamping their value chain towards a leaner business model. Victoria Kite Company's response to this is the employment of a Just-in-Time (JIT) manufacturing system. JIT is a manufacturing philosophy which essential leads to "producing the necessary units, in the necessary quantities at the necessary time with the required quality (Lean Manufacturing 2005)." With that definition, JIT became an innovative approach for companies aiming to achieve excellence in the reduction or the total elimination of "wastes" which includes overproduction, unneeded inventory, defective products, and transport and waiting time. Thus, the JIT philosophy is an elimination of non-value adding activities in the company's supply chain to boost manufacturing efficiency, driving down cost, and ensuring maximum customer satisfaction by driving down prices of commodities. This report will look at the feasibility and compatibility of this system to the company's current operations. Since these factors can be best measured quantitatively, this report will present a master budget utilizing the company's assumptions. Part 1 will provide the schedule of Victoria Kite's sales budget, cash collections, purchases budget and disbursements. The next part looks at the impacts of JIT to the company's financial performance by providing a pro-forma income statement, cash flow, and balance sheet for the first quarter of 2005. Sales Budget, Cash Collections, Purchases Budget and Disbursement January February March Schedule a: Sales Budget Total sales (100% on credit) $62,000 $75,000 $ 38,000 Schedule b: Cash Collections Current month's sales $37200 $45000 $22800 Previous month's sales $7500 $18600 $22500 Second previous month's sales $2500 $2500 $6200 Total collections $47200 $66100 $51500 January February March Schedule c: Purchases Budget Desired ending inventory $0 $0 $0 Cost of goods sold $20950 $37500 $19000 Total needed $60000 $37500 $19000 Beginning inventory $39050 $0 $0 Purchases $20950 $37500 $19000 Schedule d: Disbursements for Purchases 100% of previous month's purchases $23050 $20950 $37500 March 31 accounts payable $19000 Financial Statements Exhibit I VICTORIA KITE Budgeted Statement of Cash Receipts and Disbursements For the Three Months Ending March 31, 2005 January February March Cash balance, beginning $5000 $5000 $10850 Minimum cash balance desired $5000 $5000 $5000 (a) Available cash balance $0 $0 $5850 Cash receipts and disbursements: Collections from customers (Schedule b) $47200 $66100 $51500 Payments for merchandise (Schedule c) $35550 $37500 $19000 Rent $8050 $250 $250 Wages and salaries $15000 $15000 $15000 Miscellaneous expenses $2500 $2500 $2500 Dividends $1500 $0 $0 Purchase of fixtures $0 $0 $3000 (b) Net cash receipts & disbursements ($154000) $10850 $11750 Excess (deficiency) of cash before financing (a + b) ($15400) $10850 $17600 Financing: Borrowing, at beginning of period $15400 $0 $0 Repayment, at end of period $0 $0 $15400 Interest, 10% per annum $0 $0 $385 (c) Total cash increase (decrease) $15400 $0 ($15785) from financing (d) Cash balance, end (beginning balance + c + b) $5000 $10850 $7665 Exhibit II VICTORIA KITE Budgeted Income Statement For the Three Months Ending March 31, 2005 Sales (Schedule a) $175000 Cost of goods sold (Schedule c) $77450 Gross margin $97550 Operating expenses: Rent $17250 Wages and salaries $45000 Depreciation $750 Insurance $375 Miscellaneous $7500 Net income from operations $26675 Interest expense $20 Dividend expense $1500 Net income $25155 Exhibit III VICTORIA KITE Budgeted Balance Sheet March 31, 2005 Assets Current assets: Cash (Exhibit I) $7665 Accounts receivable $68000 Merchandise inventory (Schedule c) $0 Unexpired insurance $1125 Fixed assets, net: $12,500 + $3,000 - $750 $14750 Total assets $91540 Liabilities and Stockholders' Equity Liabilities: Accounts payable (Schedule d) $19000 Rent payable $16500 Dividends payable $1500 Stockholders' equity $59290 Total liabilities and stockholders' equity $91540 The financial statements presented in Exhibits 1-3 shows that JIT will bring in profits and incremental shareholder value to Victoria Kite Company. Exhibit 2 shows that the company will gain a net profit of $25,155 during the first quarter of 2005. However, Exhibit 2 shows that Victoria Kite Company will need additional financing in order to finance the shift from the business model. This is also in keeping with the company's goal of having a minimum cash balance of $5000 at the end of each month. The $15,400 is brought about by the relatively lower sales at the beginning of the year worsen by the accumulated accounts payable during 2004. If the company will not seek financing, it will fail to pay its suppliers for the cost of goods sold in January. Looking at Exhibit 1, failure to get a bank loan will lead to losses during in January and February. In a positive note, Victoria Kite Company is able to generate enough cash for repayments through its sales of kites. References Lean Manufacturing, 2005. Retrieved 02 August 2006, from http://members.aol.com/williamfla/jit.htm Read More