Management Accounting - Assignment Example

Executive Summary This report is a thorough assessment of the strategic and financial situation of Moonsnail Soapworks. Recognizing that the companyis trying to reach a decision whether to introduce Moon Baby Cream in the market, this paper lays out a basis which opts to aid in the company's decision making. This paper is composed of three sections. The first discusses the strategic and competitive position of the business organization. The next assesses the viability, feasibility, and profitability of launching Moon Baby Cream through a cost and benefit analysis. Lastly, this report looks at the financial position of the company and its capability to fund the project under consideration. Report highlights are as follows: The main strengths of Moonsnail Soapworks are: its unique selling proposition; high quality, all natural and handmade products; intensive product development effort; strong brand equity; and strategic marketing and location. Moonsnail Soapworks suffers from weaknesses which includes Ms. Ridgway's inadequate knowledge in management and the company's exposure to losses from product obsolescence. Opportunities abound for Moonsnail. The major opportunity for the company is the introduction of additional products to broaden and lengthen the product line and widen its customer base. As customers are becoming more and more concerned with having a natural lifestyle, it is expected that they will seek for product offerings like the ones provided by Moonsnail. The firm should also maximize the use of the internet to efficiently market its products. The major threat for Moonsnail is the unstable tourist arrival due to external circumstances. Another is the rising prices in oil prices which can further dampen the demand for tourism activities. Introduction Moon Baby Cream should be pursued as it yields positive net present value with short payback period. Moonsnail is financially capable of investing in Moon Baby Cream. The company is records remarkable profitability, high efficiency, and liquidity. Its huge cash account can be utilized to introduce its new product. Table of Contents Executive Summary 1 Introduction 3 Moonsnail Soapwork: Competitive Position 4 Product Introduction Decision 6 Financial Performance 10 Conclusion 12 References 13 Appendix 14 I. Introduction One of the biggest challenges faced by business organizations is decision making. Through this feat, the company chose among a host of possible opportunities to take advantage of and shapes its future. In decision making, a firm critically assesses possible alternatives to determine which course of action will bring maximum benefits at the same time helping the company in realizing its vision. It is imperative that in coming up with a business decision, an organization looks at its competitive position to efficiently determine if it is ready to undertake a significant move. Another factor which is equally important to take into consideration is the firm's financial position and readiness as financial resources are always needed to back company projects like product introduction. This report will examine the most pressing issue faced by Moonsnail Soapworks-the introduction of a new product called Moon Baby Cream. As stated previously, the readiness of the company to launch a product can be assessed by looking at the competitive performance and the financial position of the business organization. The next section will then take a closer look at the company by employing frameworks which are designed to determine the internal strengths and weaknesses of the Moonsnail as well as its external environment. The financial position of the firm will also be examined through ratio analysis. Lastly, the feasibility and profitability of introducing Moon Baby Cream is also analyzed through cost and benefit analysis. This report will conclude with its recommendations. II. Moonsnail Soapworks: Competitive Position SWOT Analysis SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis is one of the most widely utilized business models in assessing the current position of a business entity. This analysis is an integration of the results of other tools like the PESTEL analysis, industry analysis, and internal analysis. The company's strengths and weaknesses are derived from internal analysis while the PESTEL and industry analyses provide the required information to ascertain the opportunities and threats specific to the company. Putting all the information together will yield the needed data for the SWOT Analysis (SWOT Analysis 2006). According to Thomson (2004), a company's strength is "something a company is good at doing or a characteristic that gives it enhanced competitiveness." Meanwhile, a weakness denotes to a something that a company lacks or is not good at doing relative to its competitors. Opportunities are essential external factors, which can propel the business entity into higher profitability. Threats are external factors which causes threats to a business entity's profitability and competitive well-being. Strengths. Moonsnail Soapworks gain its popularity due to its unique selling proposition-the company positions its products as a healthy and natural. It should also be noted that Moonsnail has strong brand equity banking on its identity as a high quality product. Another strength of the company is the intensive effort exerted to develop its product line. It can be seen that the Moonsnail keep on innovating and broadening its product offering to its customers. From its early beginnings in 1995, the company was able to beef up its product portfolio which eventually led to the creation of five major product lines with more than 30 products. Marketing and location are also two strengths which can be directly attributed to Moonsnail. Banking on the intrinsic quality of its products, the marketing reach of the company proves to be wide as customers from as far as United States patronize its products. Location has also an impact to its efficiency. As tourists often visit the company's location, Moonsnail is able to target not only a local customer base but even foreigners. Weaknesses. One of the primary weaknesses of Moonsnail is the lack of management background of Jennifer Ridgway who runs the operation of the company. Ms. Ridgway is formerly a sea kayak guide and the main driving force in her running the business is her passion for herbal soaps. However, as any manager, she should have some knowledge and background in management in order to implement important business decisions. It was stated that Ms. Ridgway doesn't have enough knowledge in comprehending financial ratios, much less interpret them for business decisions. As Moonsnail Soapworks has the identity of creating healthy and natural products, it follows that the company does not use preservatives for its products. This exposes the company to the risk of accumulating huge losses due to product obsolescence. This is aggravated by the fact that the company does not always forecast its sales accurately due to the instability of various external factors. Opportunities. One of the opportunities Moonsnail faces is the introduction of Moon Baby Cream to into the market. This product, when proved profitable, is likely to bolster the sales trend of the company. The company can choose to introduce this product banking on its strong brand equity. Another opportunity for Moonsnail is the introduction of other natural products like shampoo. It can be noted that the products of the company are all in the health and beauty section which could include a product for hair care. Moonsnail can also take advantage of the present market development. It is an apparent trend that people opt for more "organic" and "natural" products. Strengthening its position in its market while beefing up its product line with healthier and more natural selections can be feasible options. Moonsnail can also take advantage of the opportunities presented by the commercialization of the internet. As geographical boundaries are eliminated through online shopping, the company can seek to cater to more locations around the globe. Threats. Moonsnail's operation is strongly tied to its external environment. As the company is highly dependent on its retail sales to tourists, Moonsnail is threatened by the recession in tourist arrival. Another threat is the continuous rise in fuel prices which strongly discourages travelers. III. Product Introduction Decision The major dilemma currently faced by Moonsnail is deciding whether to introduce the Moon Baby Cream. In terms of business aspects, we can see that it is a good move for Monsnail as introduction of a new product will further add to its wide product line. The company can use its image to market the product as well as its strong brand equity to attract potential customers. The move to launch Moon Baby Cream will also give an opportunity to bait new customers who would also be probably interested in using other products in the firm's portfolio. However, the decision should also be evaluated from a financial point of view. Though the product is dependent and will surely have a huge impact in the whole operation of the business organization, it is irrefutable that analyzing the option quantitatively will yield a significant basis for the decision to be crafted. This section will provide a cost and benefit analysis of the proposed introduction of Moon Baby Cream. All the figures to be utilized are based on the estimates given by Ms. Jennifer Ridgway. Production Costs Table 1 shows the input costs of producing one batch of Moon Baby Cream. One batch of production will yield to one liter or 30 jars of output. Primary inputs are calendula grapeseed, chamomile extract, rosehip seed oil, vitamin E, aloe vera gel, distilled water, coconut oil, and beeswax. Adding up the individual cost of the input will give a total of $10.8595. Table 1. Input Cost per Batch of Moon Baby Cream Production Packaging cost will also be incurred should the product be introduced. Total packaging costs which include jars, top labels, and bottom labels are shown in Table 2. Accordingly, a jar of Moon Baby Cream will generate $0.3518 packaging costs. Table 2. Packaging Cost per Jar of Moon Baby Cream According to the data given by Ms. Ridgway, Moonsnail will incur three hours of labor cost for the production of Moon Baby Cream. These three hours of labor will be allocated in the production, packaging, and labeling the goods. Labor cost is $6.50 hours giving a total of $19.5 per production batch. However, one should note that production of the baby cream will not lead to additional labor cost for the company but would serve as a "proxy to allocate indirect operating expenses." Other costs which will be incurred by Moonsnail Soapworks is the $1, 000 advertising cost which will cover the cost of launching the new product to the market and $300 for the two printing plates required for label printing. Table 3 shows the cost of Moon Baby Cream batch and unit production. Variable costs include input and packaging costs and totaled $21.42 per batch and $0.7138 per jar. Labor costs are treated as fixed costs as it is not dependent on the level of output. However, we have assumed that production will be made on a per batch basis and each batch consists of 30 jars. Thus, costs are allocated such that the labor costs are divided by the total number of jars in each production run. Finally, the computed cost per batch is $40.9126, giving a per unit production cost of $1.3638. Table 3. Per Batch and Per Unit Production Costs Cash Flow In order to fully asses the feasibility and profitability of launching the new product, we look at the annual streams of cash flow resulting from the introduction of Moon Baby Cream. In computing the annual cash flow, we have used the following assumptions: a. Production and marketing of Moon Baby Cream will commence on 2001. All investment costs like advertising and printing plate purchase will be incurred in 2000. b. Products will be sold through retail and wholesale channels. Moonsnail Soapworks will charge a price of $9.95 for retail and $6.00 for wholesale. c. One thousand jars of Moon Baby cream will be sold through retail in 2001. We will employ a conservative assumption that retail sales will increase by an annual rate of 10%.1 d. We expect to have five retail channels each selling 30 jars of Moon Baby Cream monthly. Contrary to what Ms. Ridgway expect, we will use a more conservative assumption of generating 3 accounts each year which sells the same quantity as the other channels.2 Delivery will be done once every three months or four times a year and delivery costs of $10.00 will be shouldered by Moonsnail Soapworks. e. All investments will be financed by equity. f. Tax rate is 40%. g. Risk adjusted cost of capital is 10%. Table 4. Annual Discounted Cash Flow (2000-2006) Table 4 shows the annual cash flow based on the aforementioned assumptions. The initial cash outlay needed ($1,300.00) to cover the advertising costs and purchase of printing plates will be recouped in the first year of the product's introduction to the market. We can also see an increasing trend in cash flow due to higher expected sales volume both from retail and wholesale channels. Discounting the cash flow to consider the time value of money, we can see that introducing Moon Baby Cream is profitable. The investment has basically a payback period of less than one year. The net present value of the product introduction is positive evidenced by the positive values of cash flows from the first year to the fifth year alone. Based on the financial analysis above, it is strongly recommended that Moonsnail Soapworks launch Moon Baby Cream. This is supported by the short payback period and positive net present value computed for the project. III. Financial Performance Moonsnail's financial performance can be assessed through the use of various financial ratios. Financial ratio analysis is a very essential tool in assessing the financial health of a business entity. Specifically, it enables a financial analyst to spot trends in a business and to compare it with the performance of similar business enterprises within the same industry. Financial ratios are grouped into four categories, each showing a different aspect of a company's financial operations. These are profitability, financial leverage or gearing, liquidity or solvency, and activity ratios (Duncan 2006). Profitability ratios measure the ability of the company to generate income from its investments less the costs. Moonsnail Soapworks is able to record impressive profitability ratios. During 2000, gross profit margin is 0.8206 showing that the company's revenue is comprised of 18% cost of goods while 82.06% represents margin. Moonsnail also records impressive net profit margin ratio of 0.3480 indicating that 34.80% of the company's total sales is converted as net income Table 5. Profitability Ratios Financial leverage or gearing ratio provides an indication of the long-term solvency of the firm. They indicate the extent of non-owner claims on the firm's profits as well as the firm's operating capability to meet its obligation. Two leverage ratios are computed for Moonsnail-debt to assets ratio and debt to equity ratio. The debt to assets ratio of 0.4238 shows that the owners of the company finance more than 57% of the company's resources. Thus, ownership is less concentrated on creditors. Table 6. Leverage Ratios Liquidity or solvency ratios are used as measures of the company's ability to finance its short-term obligations by its cash and near cash items. Included in these ratios are current, quick, and cash ratios. Working capital can also be regarded as a measure of liquidity. Moonsnail Soapworks has a positive working capital which indicates that currents assets exceed current liabilities. This is also supported by the 1.75 current ratio. The company is relatively liquid as the company's cash account is more than enough to pay off all its immediate obligations. The narrow gap between current and quick ratios also indicate low inventory. Table 7. Liquidity Ratios Activity ratios are also referred to as efficiency ratios as they measure the ability of a company to maximize output given a certain level of inputs. In the case of Moonsnail, we can see a fairly high input utilization. The return on asset ratio of 0.9662 reflects that each dollar of asset generated another $0.9662 while the 10.8695 fixed asset turn over states that the every dollar in the company's fixed assets generated $10.8685. Table 8. Activity Ratios Generally, we can see that Moonsnail is in a financially stable situation. High and positive profitability ratios indicate the firm's ability to manage its cost in order to generate enough profit. Moonsnail's liquidity is also remarkable as it has current assets over and above its current obligations and high level of liquid assets to finance its current liabilities. The huge cash account somehow has a negative implication for the company as viable investments which needs funding could be available to take advantage of. Moonsnail's excess cash can be freed up to take advantage of profitable opportunities. In terms of activity, Moonsnail is also in good position as its assets are utilized to maximize its output. The company chose to use less risky financing-equity over liabilities. However, we should note that all the liabilities of the firm are short term implying that they should be paid within the financial period. It is advised that the company seek less immediate obligations in the form of long term liabilities. IV. Conclusion In conclusion, it is recommended that Moonsnail pursue its introduction of Moon Baby Cream. For one, this is one of the major opportunities faced by Moonsnail. Introduction of a new product will be backed by the strength of the firm in marketing natural and healthy products. Introduction of Moon Baby Cream will be viable and profitable as supported by the discounted cash flow analysis. Lastly, the company has enough resources and huge cash account to fund the project. References Duncan, W, Financial Ratio Analysis, Retrieved 24 April 2006, from http://www.bized.ac.uk/compfact/ratios/index.htm SWOT Analysis 2006, Retrieved 24 April 2006, from http://www.mindtools.com/pages/article/newTMC_05.htm Thompson, A. & Strickland, J, 2002,Strategic Management, 3rd ed. New York Mc Graw-Hill. Appendices Appendix 1. Quantity Sold Through Retail and Wholesale Channels (2001-2006) Read More