New Lemona Drink Entrepreneurs - Essay Example

?New Lemona Drink Entrepreneurs Executive Summary This is an entrepreneurial project proposal that is aimed at wooing the financial support of a business funding agency and is able to capture a reasonable market size. It will entail all the required concepts in the project proposal; plus the business marketing fundamentals that are viable to make meaningful returns. The proposal must present an innovative and convincing idea both to the prospective clients and the funding body with adequate consideration of the other stakeholders and the general community at large. Any business venture demands critical economic analysis for its survival amidst the other numerous entrepreneurs in the same firm. In that respect, New Lemona Drink Entrepreneurs main goal is to provide the best nutritious soft drink to our clients’ at the most affordable prices in the market. Background Information The central issue of focus in this proposal is to establish the best remedial measure against the menace of malnutrition. This problem has been gaining momentum of the past centuries and is headed to ruin the better part of the coming generation. The increased nutritional imbalances and inadequate consumption of fruits has been blamed on this health matter. Nevertheless there are other unidentified factors attached to it that has not been given critical analysis so as to come up with an all round measure. It has also been noted that some of the nutritious measures that had been developed to curb this condition have failed woefully in different ways. It is out of this need by the society that New Lemona Drink entrepreneurs has invested resources to come up with an a soft drink that would see the menace reduce by more than half by the year 2030. New Energy Drink Costing and Report for Investors The firm has decided to launch a new drink product named “New Lemona Drink”. In this regard the costing and other relevant information is presented below. On the basis of this information and analysis, a report for investors has been drawn. Assumptions Following are the assumptions on which the manufacturing and sales of the new energy drink are based: a. The company uses its already established main manufacturing unit which has enough capacity to meet the requirements for the production of “New Lemona Drink”. Furthermore, the machinery which was partially in use previously has also been deployed for the purposes of the production of this new product. b. There is no additional labor required for the production, as the management has initiated the day and night shifts for production. Initially only a quarter of the total labor employed is required and henceforth with efficient rotation program, the company is employing its existing labor in the day and night shifts. c. The suppliers of the raw material for manufacturing “New Lemona Drink” are principally the same which are usually contacted for the purchase of raw materials for other products. Only one new supplier has been introduced being named here as “Juicy Suppliers and Manufacturers”. This supplier provides the material specially designed for the taste of the new product. d. The “New Lemona Drink” is manufactured by Fresh fruits. Harvested fruits will be used in the manufacturing of the entire drink. e. The drink will be available in containers of 300ml and 500ml f. The packing of the drink is outsourced from Olive Packaging Company. The drinks box carries the company name and logo with features of the product clearly mentioned. g. The company is employing the marginal costing approach in determining the cost and margins associated with the new product. The approach will consider the variable portion of the total costs of the product and will then be subtracted from the revenue to show the total contribution margin of the product. This approach has been adopted on the basis that the manufacturing of this new product does not require significant amounts of fixed costs and therefore it is possible to analyze the profitability and viability of the product while considering the variable costs of production only. h. The profit margin or the contribution margin which is set for each pair of shoe is 25%. The basis upon which this rate is determined is the prevailing profit rates in the market. The leading brands in the New Lemona Drink manufacturing and selling business have a slightly higher rate of profit. j. Keeping in view the marginal costing approach, the following is the breakup of total variable expenses incurred on the manufacturing of one 300ml New Lemona Drink: Breakup of Variable Costs per unit Particulars Amount Direct Labor per unit $ 10.00 Direct Material per unit $ 22.50 Other Direct expenses per unit $ 5.00 Variable Overheads per unit $ 12.50 Variable Proportion of Administrative Cost per unit $ 7.50 Variable Proportion of Distribution and Selling Costs per unit $ 2.50 Total Production Cost per unit $ 60.00 k. Keeping in respect to the breakup of variable costs presented above, the contribution margin of 25% can be applied on the total cost of a single bottle of 300ml. Upon applying this rate, the amount for contribution margin comes out to be $ 25.00. Therefore, the total price of the product is determined as $ 75.00. This price can be termed as competitive as it is slightly lower than the prices offered by leading brands for similar type of products. l. It is assumed that the company makes 75 percent of its sales on cash and the remaining 25 percent portion is sold on credit. m. The proportion of variable and fixed costs in factory overheads, administrative costs and selling and distribution expenses are assumed as follows: Item Amount Factory Overhead Variable Portion 80 % per unit $ 10.00 Fixed Portion 20 % per unit $ 2.50 Total Cost per unit $ 12.50 Administrative Costs Variable Portion 75 % per unit $ 5, 625 Fixed Portion 25 % per unit $ 1, 875 Total Cost per unit $ 7.50 Selling and Distribution Costs Variable Portion 70 % per unit $ 1, 75 Fixed Portion 30 % per unit $ 0,75 Total Cost per unit $ 2.50 Following is an income statement presented for the new product which has been prepared under marginal costing on a ‘per unit’ and 12 months sales/production basis. Income Statement Variable Cost Fixed Cost Amount Sales (300 x 12 x 150) 540,000 Direct Material (300 x 12 x 45) 162,000 Direct Labor (300 x 12 x 20) 72,000 Other Direct expenses per unit (300 x 12 x 10) 36,000 Prime Cost 270,000 Overheads Costs Variable 80 % Fixed 20 % (300 x 12 x 25) 90,000 (300 x 12 x 6.25) 22,500 Factory Cost 360,000 22,500 Administration Costs Variable 75 % Fixed 25 % (300 x 12 x 15) 54,000 (300 x 12 x 5) 18,000 Cost of Production 414,000 40,500 Distribution and Selling Costs Variable 70 % Fixed 30 % Variable Proportion (70%) (300 x 12 x 5) 18000 (300 x 12 x 1.25) 4,500 Total Variable Cost B 432,000 Total Fixed Cost 45,000 Contribution Margin A-B 108,000 Less: Total Fixed Cost 45,000 Net Profit 63,000 The objective of the firm, in this case, is to avail a drink at reduced prices through careful maintenance of efficiency in the operations of the firm, and by aiming at specific market segments especially those who pay for the drink themselves. By focusing on this segment the firm will avoid inefficiencies and operational disruptions that are characterized by unsteady cash-flows and hence eliminate supply shortages. New Lemona Drink plans to operate from one store that is to serve both mail order customers and those who visit the outlets in person. The firm seeks to thrive through employment of friendlier and skilled staff, which in combination with our great prices is set to propel the repeat business that will be reliable. The firm expects that as the price of fruit drinks continues to rise, New Lemona Drink will be appealing more and more the clientele sense of value, affordability and convenience. The firm's advertising, mainly through the ads in magazines targeted by a relatively greater crowd, will be aiming at those who seek to save money on high price but necessary and regular expenses. New Lemona Drink entrepreneurs will be led by Experienced PHD holder in the field of Nutrition and with an accumulated wealth of experience in relevant field not less than five years. The cost of the entire venture will be minimized by maintaining just a few food and beverages experts and filling the remaining gaps with food science trainees. In so doing, the firm expects to reach profitability by third year and will generate substantial sales by mid of the same year. Market Analysis New Lemona Drink Entrepreneurs target market consists of mainly two different groups of clients, that is, the local (walk-ins) and international customers (the mail customers). In reaching out to these two diverse potential customers, New Lemona Drink will deploy two strategies to extensively provide coverage for this diverse market segments. Market Segmentation New Lemona Drink Entrepreneurs’ customers are broken down into two main groups, namely, local and international. Following increasing global concern on healthy foods, there has been needed to look into this problem among the productive sector of the economy. Poor nutritional balance, like other food related health hazards, raises global health concern. The Walk-in Customers are local customers whose incomes are low and therefore look for the lowest cost source of vitamin. Their income is constrained and thus they may only afford relatively low priced source of vitamin. However, they are not only after price but also quality of the product. Currently, with the increasing cost of living, they complain of high costs of source of vitamin charged by the local producers. The second group of New Lemona Drink Entrepreneurs’ targeted customers is the international and the affluent groups. This group of customer is referred to as Mail Order Customers. This group of clients makes their soft drinks orders via the mail in a bid to save on the cost of traveling. Notably, New Lemona Drink Entrepreneurs’ introduces this scheme to care for the effects of globalization on communication, information and transport. Unlike the younger generation, the old generation need for Vitamin care increased with increase in age, thus the need to care for them. This mail service is used to cater for the increasing need to address chronic health related cases among the higher income group who are able to purchase more than one month’s stock at once. Competition and Market Patterns Just like in other business sectors, food sector faces stiff and unfair competition, which takes different forms. To match the modern trend in business, New Lemona Drink Entrepreneurs’ will prefer e-commerce trading. This method has an advantage of being able to reach out to many potential customers globally. Besides, New Lemona Drink Entrepreneurs’ would advance their marketability through: Chain Nutrition and drinks Centers: Chain marketing has the advantage of increasing the accessibility of the company products and moving services closer to customers. It help reduce transport cost that would have incurred by the customers had the services been centralized. To the company chain stores enjoy economies of scale, which reduces the cost of production per unit of output, hence more profitable. Customer will enjoy personalized services at their disposal with chain stores. Local outlets: these soft drinks outlets are preferred for the locals (walk-in customers). In these outlets, the clients has close personal contract with the specialist in charge who in-turn has detailed description of the significance of the drink to the customer. Internet distribution sites and Mail Orders: these are common to international clients (Mail Order Customers). It is of preference to these clients as it helps in reducing transaction costs related to travels and ordering. However, it may be expensive if the cost of mailing is relatively high. The company would use its website in developing visibility and to disseminate information among its potential customers. Competitiveness of New Lemona Drink Entrepreneurs’ The industry exhibits a number of players with similar objective (profitability and wealth maximization). Though there are many players in the market, New Lemona Drink Entrepreneurs’ will focus on beating her competitor in price, quality and service delivery (Szwarc, 2005). Competitive Edge New Lemona Drink Entrepreneurs’ competitive edge over the competitors is superior price discrimination mechanisms. The company practices first, second and third degree price discrimination. By considering the variation in income, the company charges different prices to different groups in the society. In addition, New Lemona Drink Entrepreneurs’ maintains relatively affordable rates for its products by painstakingly maintaining low costs through efficient operation (Wesley, 1956). This would be achieved through reducing the administration costs, increasing working hours for our staff, and conducting our main operations through mail orders as opposed to keeping large staff in departmental stores. Marketing Strategy Our marketing strategy would be use appealing adverts to promote, and popularized our products and services. The main objective of this strategy would be to increase the awareness of the customers on our competitive prices and our quality products. The company will popularized internet advertising method and local media. Sales Strategy Our sales strategy would be based on developing sustainable long-term loyalty with the potential customers. To achieve this objective, our company would provide reliable, quality and affordable nutritious soft drinks to clients both locally and internationally. In addition, our shipping and delivery services would be reliable, cost effective and sustainable over time. Our sales representatives are located worldwide to serve customers’ needs. Sales Forecast During our first quarter of operation, we will focus on establishing customers’ loyalty both locally and internationally. In the second quarter, the company would first give attention to the local (walk-in customers) by constructing front stores in the local scene. In the third quarter of the first financial year, the company will go cross-border and seek international customers (mail order customers). In the last quarter, New Lemona Drink Entrepreneurs’ would expect her sales volume to account for at least 60% of the total output during the year. In the subsequent financial periods, the company sales are estimated at 90% of the market share. Milestones New Lemona Drink Entrepreneurs’ will counter the following milestones at its onset period (Abrams & Eugene Kleiner, 2003). Profitability Strategic relationship establishment Business set Sunk costs Competition from already established firms Management Strategy The company will be managed by board of directors appointed on merit and with vast experience in management of food and beverage plus nutrition corporations. At the helm of this team will be chairperson to the board assisted by the Chief Executive Officer. All the members of the management team are MBA graduates with efficient management skills. It is this management team that would make decisions regarding investment plan, expansions and marketability of the company. Besides, all the ten members of the management team are graduates in food and beverage plus nutrition from state universities. Personnel Plan New Lemona Drink Entrepreneurs’ will recruit the following staff: Sales representatives and agents Food and beverages experts Nutrition management trainees Order fulfillment agents Counter persons and phone representatives Financial Plan This section will provide useful financial information for the company. In this section, the company will outline its estimated expenditure, cash-flows and balance sheet. Other content are revenue estimates and income statement. Sales Focus Over the next 5yrs Year Sales Volume, % 2012 75 2013 78 2014 85 2015 91 2016 88 Marginal Cost A marginal cost usually refers to the change in the costs witnessed in production when a change in production takes place. For the firm, the marginal cost is calculated as a product of the marginal costs in total divided by the change seen in the total output. Marginal Cost = sum of Changes costs/ summed output In this case, change in total costs for the energy drink Break Even Analysis To get the breakeven point, = Fixed costs divided by (Selling price per unit minus variable costs) =50.5/ (58-57) =50.5 (per unit) In this case, it would be graphically represented thus: Cash Flow Statement Projection Year Cash-flow in million $ 2012 980.80 2013 1020.00 2014 1095.50 2015 1250.90 2016 1300.00 Break Even Analysis Break Even Analysis for the first 12 months in units and in amount is presented as follows: Total Units Produced per month 300 units Total Revenue (300 units x $ 150) $ 540,000 Total Variable Cost (300 units x $ 120) $ 432,000 Contribution Margin (Total Revenue - Total Variable Cost) $ 108,000 Contribution Margin per unit (Total Contribution Margin) $ 30 Total Fixed Cost $ 45,000 Breakeven Point (Total Fixed Cost / Contribution Margin) $ 1,500 Breakeven Point (Total Fixed Cost / Contribution Margin) $ 12,125 Breakeven Point (Total Fixed Cost / Total Variable Cost / Total Sales) $225,000 Income Statement Following is the income statement presented for the first year of the new products’ sales: Particulars Amount in millions Net Cash Sales $ 378,000 Credit Sales $ 162,000 Total Sales $ 540,000 Total Variable Costs $ 432,000 Contribution Margin $ 108,000 Total Fixed Costs $ 45,000 Net Profit for the year $ 63,000 Balance Sheet Following is the balance sheet presented for the first year of the sales of the new product of the company: Particulars Amount in millions Assets Non-Current Assets Machinery, Plant and Equipment $ 9,969.00 Land and Building $ 50,000.00 Total Non-Current Assets $ 60,000.00 Current Assets Inventory $ 9.00 Account Receivables $ 220.00 Cash $ 100.00 Total Current Assets $ 329.00 Total Assets $ 60,329.00 Liabilities Non-Current Liabilities - Current Liabilities $ 5.00 Total Liabilities $ 5.00 Equity Contributed Equity $ 49,200.00 Retained Earnings $ 11,124.00 Total Equity $ 60,324.00 Total Equity and Liabilities $ 60,329.00 Sales? $378,000 Credit Sales $ 162,000 Total Sales $ 540,000 Total Variable Costs $ 432,000 Contribution Margin $ 108,000 Total Fixed Costs $ 45,000 Net Profit for the year $ 63,000 Cash Flow Statement Following is the Cash Flow Statement for the first year of the company after the production of the new product: Particulars Amount Receipt Cash Sales $ 378,000 Cash Receipts for credit sales $ 97,200 Total Cash Receipt $ 475,200 Payment Cash Payment for direct material $157,000 Cash Payment for Labor $ 72,000 Other Direct Expenses $ 36,000 Overhead Expenses $ 72,000 Cash Payment for Distribution $ 22,500 Total Cash Payment $ 359,500 Net cash flow for the Year $ 115,700 Beginning Cash $ 15,300 Cash at Year 1 $ 131,000 ? 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