The Company Island Wheels Ltd - Term Paper Example

Financial Report

The company Island Wheels Ltd.is manufacturing bicycles and in order to meet the production requirements the amount of steel alloy, aluminium alloy and titanium alloy for the month of October, November and December needs to be estimated

The amount of materials required can be calculated as follows;

TotalAmount of steel alloy required (Material required x Sales Forecast)

RoadTrekBMX

October 80kg160kg2250kg

November 70kg180kg225kg

December90kg240kg375kg

January60kg200kg195kg

Amount required for October is 80kg+160kg+2250kg= 2490kg.

Deduct opening inventory 24 kg

2466 kg

Holding inventory for 5% of next month requirement .

November requirement is 70kg+180kg+225kg = 475kg x5%= 23.75kg

Total steel alloy requirement for October is 2466kg+23.75kg = 2489.75kg

Amount required for November is 70kg+180kg+225kg= 475kg.

Deduct opening inventory 23.75 kg

451.25 kg

Holding inventory for 5% of next month requirement

December requirement is 90kg+240kg+375kg = 705kg x5%= 35.25kg

Total steel alloy requirement for November is 451.25kg+35.25kg = 486.5kg

Amount required for December is 90kg+240kg+375kg= 705kg

Deduct opening inventory 35.25kg

669.75kg

Holding inventory for 5% of next month requirement

January requirement is 60kg+200kg+195kg = 455kg x5%= 22.75kg

Total steel alloy requirement for December is 669.75kg+22.75kg = 692.5kg

Total amount of aluminium alloy required(Material required x Sales Forecast).

RoadTrekBMX

October 1040kg280kg750kg

November 910kg315kg75kg

December1170kg420kg125kg

January780kg350kg65kg

Amount required for October is 1040kg+280kg+750kg= 2070kg.

Deduct opening inventory 130kg

1940 kg

Holding inventory for 10% of next month requirement

November requirement is 910kg+315kg+75kg = 1300kg x10%= 130kg

Total aluminium alloy requirement for October is 1940kg+130kg = 2070kg

Amount required for November is 910kg+315kg+75kg = 1300kg

Deduct opening inventory 130kg

1170kg

Holding inventory for 10% of next month requirement

December requirement is 1170kg+420kg+125kg = 1715kg x10%= 171.5kg

Total aluminium alloy requirement for November is 1170kg+171.5kg = 1341.5kg

Amount required for December is 1170kg+420kg+125kg = 1715kg

Deduct opening inventory 171.5kg

1543.5kg

Holding inventory for 10% of next month requirement

January requirement is 780kg+350kg+65kg= 1195kg x10%= 119.5kg

Total aluminium alloy requirement for December is 1543kg+119.5kg = 1662.5kg

Total Amount of Titanium alloy required((Material required x Sales Forecast).

RoadTrek

October 240kg360kg

November 210kg405kg

December270kg540kg

January180kg450kg

Amount required for October is 240kg+360kg= 600kg

Deduct opening inventory 25kg

575kg

Holding inventory for 35% of next month requirement

November requirement is 210kg+405kg = 615kg x35%= 215.25kg

Total titanium alloy requirement for October is 575kg+215.25kg = 790.25kg

Amount required for November is 210kg+405kg= 615kg

Deduct opening inventory 215.25kg

399.75kg

Holding inventory for 35% of next month requirement

December requirement is 270kg+540kg = 810kg x35%= 283.5kg

Total titanium alloy requirement for November is 399.75kg+283.5kg = 683.25kg

Amount required for December is 270kg+540kg = 810kg

Deduct opening inventory 283.5kg

526.5kg

Holding inventory for 35% of next month requirement

January requirement is 180kg+450kg = 630kg x35%= 220.5kg

Total titanium alloy requirement for November is 526.5kg+220.5kg = 747kg

The amount of materials needed for the quarter has been calculated , now Damian need to make the sales forecast for which certain factors need to be considered.

Factors need to be considered while preparing a sales forecast is listed below;

Previous Economic Performance - In order to forecast sales it is necessary to look at the historical data of the business. “A sales forecast is an essential tool for managing a business of any size. It is a month-by-month forecast of the level of sales you expect to achieve” (IE ) .This data helps in depicting the sales performance of the business at different market condition. This data can help the sales forecaster to prepare for contingencies in the future and forecast sales which is viable.

Existing Global Environment - Before preparing a sales forecast it is essential to look at the way the world is functioning. The global business environment can be classified into the external environment and the internal environment. “The external environment includes the social, political, economic, regulatory, tax, cultural, legal, and technological environments”( ICMR). A political or economic situation in one part of

the world can affect the other part as world is interconnected. An event like war or political election can have an effect on the sales of the business.

Existing Industry Condition – The sales forecaster need to consider the existing industry condition throughout the world before preparing a sales forecast. The market share, government policies, competitor performance need to be analysed before the sales forecast is formulated. “The making of a proper sales forecast requires assessment of two sets of factors, the outside uncontrollable forces likely to influence the company's such as the weather, government activity and competitive behaviour” (Gupta 1-7).

Internal Organizational changes – The sales forecaster needs to contemplate on the organizational changes in the business in the recent times as it can bring unpredictability for the investors. “From a passive perspective, organizational change occurs as a reaction to an ever-changing environment or as a response to a current crisis situation” ( Chen 12-26).

The internal changes can dwindle the stake holders investment interest and hence considering the internal organization changes can help the investors to adapt well if sales does not satisfy the targets.

Now, it is time to decide whether the business should accept the proposal for the introduction of helmet in the production line. For this it is necessary to calculate the breakeven point for the proposed helmets.

The Breakeven point can be calculated as follows;

Breakeven point in Units = Fixed Cost

Sales Price per Unit – Variable Cost per Unit

Now it is needed to calculate the Fixed Cost ;

Cost of renting Mechatron H688 (machine) per year - $450,000

Cost of materials to produce helmets – $25.70

Cost of one extra production supervisor – $85,000

Cost of two extra production staff (Full-time) - $110,000

Fixed Overhead Cost -$46,200

Fixed Cost$691225.7

The Variable Cost can be calculated as follows;

Variable overhead cost - $ 14.30 per unit

Variable marketing cost - $2.00 per unit

Variable packaging cost per helmet - $5.00 per unit

Variable cost per unit$21.3 per unit

Breakeven Point in Units = $691225.7 = $ 691225.7 = 15,817

$65 - $21.3 $43.7

So we can see that the Island Wheels Ltd has to sell 15,817 units in a year to cover the expenditure of the production.

This means in a month 1318 units need to be sold cover the expenditure.

Since the expected sales is 3000 units a month the company can earn good profit in a year if they sell over 1318 units and hence the company need to proceed with the proposal of producing helmets.

Now that the company can accept the proposal of producing helmets it is time to determine whether the company should go ahead and produce seat posts.

For this it is necessary to calculate the production cost of the seat post and then calculate the profit that can be achieved by selling the same.

Production Cost of 3500 Seat Posts can be calculated as follows;

Direct Material Cost – $161,000

Direct labour - $52,500

Fixed Overhead -$ 26,250

Variable Overhead - $52,500

Manufacturing overhead-$78,750

General and administrative overhead- $15,750

$ 386,750

Production Cost for each Seat Post = 386,750 = $110.5

3500

Purchase Price of each Seat Post = $ 76

If the production cost of one seat post is $110 and the purchase price for each unit is $76, it is not advisable for the Island Wheelers Ltd to produce their own seat posts as this will result in major loss for the company.

Even though, the production decision regarding the proposed helmet and Seat Post had been made , it is essential to understand that there are certain other factors which need to be considered before an apt decision is made.

These factors can be detailed as below;

Product Market– Before the decision for the production of helmet and seat post is made the company need to determine the market for its proposed products. “Product market frictions decreases the steady state equilibrium, improve the cyclical properties of the model and provide a more realistic picture of firms’ business environment”(Matha). This means the targeted market and the potential consumer need to be studied so that the sales of the product are not affected.

Competitors Analysis – Any product which is released in the market has to face competition and it is the hard fact of business. So, the business needs to study and analyse their competitors on a local and international basis before the production decision is finalized. “Today’s competitive situation among companies is characterized by globalization, and the need to survive has led to an urgent need for competitiveness management”(Enida).

Product Quality - Quality of the product to be produced is a prime factor to be considered before the production decision is made. The quality of the products decide the production cost and in turn increases the selling price of the product . “Product quality is rapidly becoming an important competitive issue” (Garvin).So it is important for the business management to decide the level of quality of the product before they decide about the production of helmets and seat posts.

Customer Preference – A product is produced for the customers hence it becomes important for the management to analyse the customer preference for the proposed product. The customer preference gives creative idea to the management to customize their product to suit consumer taste and in turn this increases business profit.