Available and Interested Potential Investors in the Energy Drink Industry - Research Paper Example

1. The assumptions used to produce the key financial figures are varied and they are to ensure that the financial data used are realistic and reliable by the users of the financial information. The assumptions include the following:- That the cost of sales figures to be used in the calculations is 45% of the identified sales figure. That the chosen cost of sales figure will be used to estimate the value of the variable cost; this is because the cost of sales figure entails the costs of direct labor, direct labor and all the direct overhead costs. That the gross profit margin will be 55% of the sales figure when the cost of sales is estimated at 45%. That for the energy drink, the net profit value as a percentage of sales is estimated at between 12% to 18%. That the fixed cost will be estimated as the difference of the gross profit and the net profit figures That the direct costs; both for materials and labor is estimated at between 22% to 27% of the sales figure. 2. Assuming the drink being produced is of the 250ml packet in a bottle type of packaging. Assuming the number of units of the drink produced is 6000 units, the variable cost per unit is provided as follows: - direct materials $2, direct labor $4, variable manufacturing overhead $1, variable selling and administration expenses $3. The fixed costs of the product per annum are estimated as follows; fixed manufacturing overhead $30,000 and fixed selling and administration is $10,000. The selling price per unit produced is estimated as $15. The marginal costing statement will appear as follows: Product cost per unit Direct materials $2 Direct labor $4 Variable manufacturing overhead $1 Product cost per unit $7 The variable costs for the production of the drink for the 6000 units will be 6000*$7 = $42000. The costs for the production of the drink for the whole year will therefore be as follows: Total variable costs $42000 Fixed manufacturing overhead $30000 Fixed selling and administration $10000 Total costs $82000 The total cost per unit for the drink per month will be $82000/12 = $6833.3. The $30000 fixed manufacturing overhead will be is charged off in total against the income as a period expense. The same applies to the selling and administration expense. Under this form of costing system, all the variable costs of production are included in the product cost. This means that if the variable cost of the product per unit is $7, then only $7 will be deducted as the cost of goods sold per unit. All the unsold units will also be carried in the balance sheet inventory account at just $7. 3. Produce a break-even analysis (table and graph) for your product based on 12 months activity Breakeven point shows the level of sales by a business to enable it cover all its costs. The sole objective of breakeven is to enable the business be able to work out the contribution made from the sale of each unit. This is because the amount at which each unit is sold will significantly contribute to pay for the indirect costs and the fixed costs of the business. Total units produced 6000 Total revenue 90000 Contribution margin 50000 Total fixed cost 40000 Break even units 5000 NB: The variable cost per month will be; 42000/12 = $3500 and the Break even in units will be; 40000/ (15-7) = 5000 units The Break Even Table JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Units Sold 500 500 500 500 500 500 500 500 500 500 500 500 Total Revenue in $ 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500 7500 Variable Costs in $ 3500 3500 3500 3500 3500 3500 3500 3500 3500 3500 3500 3500 Contribution margin 4166.7 4166.7 4166.7 4166.7 4166.7 4166.7 4166.7 4166.7 4166.7 4166.7 4166.7 4166.7 Fixed costs Manufacturing in $ 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500 S & D 833.3 833.3 833.3 833.3 833.3 833.3 833.3 833.3 833.3 833.3 833.3 833.3 Total FC 3333.3 3333.3 3333.3 3333.3 3333.3 3333.3 3333.3 3333.3 3333.3 3333.3 3333.3 3333.3 Break Even Units 416.7 416.7 416.7 416.7 416.7 416.7 416.7 416.7 416.7 416.7 416.7 416.7 The Break Even Graph NB: Variable cost per unit is $7 while the Contribution Margin per unit is $15-$7 = $8. The contribution margin ratio will therefore be 8/15; Breakeven sale revenue = 40000/ (8/15) = $75,000 Breakeven in Units = 40000/ (15-7) = 5,000 units (these are represented in the above graph) 4. a. Cash Budget Month Sales Revenue (SR) $ Variable costs $ Fixed costs $ TC $ Estimated profits(SR-TC) January 7500 3500 3333.3 6833.3 666.7 February 7500 3500 3333.3 6833.3 666.7 March 7500 3500 3333.3 6833.3 666.7 April 7500 3500 3333.3 6833.3 666.7 May 7500 3500 3333.3 6833.3 666.7 June 7500 3500 3333.3 6833.3 666.7 July 7500 3500 3333.3 6833.3 666.7 August 7500 3500 3333.3 6833.3 666.7 September 7500 3500 3333.3 6833.3 666.7 October 7500 3500 3333.3 6833.3 666.7 November 7500 3500 3333.3 6833.3 666.7 December 7500 3500 3333.3 6833.3 666.7 NB: it is assumed that the sales and the costs are spread equally throughout the year and hence the profitability takes the same spread throughout the year. b. Forecast income statement for the year These projections will show all the revenues of the business and compare them to the expenses. In such efforts, it will try to determine the monthly and the yearly profitability of the business. Sales Cost of sales Gross profit Expenses Net profit January 7500 3375 4125 3000 1125 February 7500 3375 4125 3000 1125 March 7500 3375 4125 3000 1125 April 7500 3375 4125 3000 1125 May 7500 3375 4125 3000 1125 June 7500 3375 4125 3000 1125 July 7500 3375 4125 3000 1125 August 7500 3375 4125 3000 1125 September 7500 3375 4125 3000 1125 October 7500 3375 4125 3000 1125 November 7500 3375 4125 3000 1125 December 7500 3375 4125 3000 1125 NB: cost of sales is projected to be 45% of the sales figure, hence; 45%*7500 = $3375 while the net profit is projected at 155 of the sales. c. Forecast Balance Sheet Items Historical Projected Current Assets $ $ Cash in bank 6100 9400 Accounts receivable 500 735 Inventory 2800 1700 Total CA 9400 11835 Fixed assets Machinery & equipment 10000 11000 Furniture & fixtures 3000 3500 Land & buildings 15000 17000 Total FA 28000 31500 TOTAL ASSETS 37400 43335 Current liabilities; Accounts payable 5000 6000 Interest payable 600 750 Short term loans 2000 0 Total CL 7600 6750 Long term liabilities; Bank loans payable 10000 7000 Notes payable 500 800 Total LTL 10500 7800 TOTAL LIABILITIES 18100 14550 Owner’s Equity; Invested capital 10000 10000 Retained earnings 9300 18785 TOTAL LIABILITIES & EQUITY 37400 43335 5. Expiations of the costing and financial data Introduction The explanation below is meant to provide an insight to the available and interested potential investors in the energy drink industry. The proprietors to posses believe the energy drink developed the ability of revolutionizing the whole energy drink industry. As compared to the other drinks already in the market, the drink is healthier. The investment is worthwhile given the fact that it requires just enough capital to start and the operation costs are not that high. For a start, the industry intends to only produce the units of the 250ml packets and package them in plastic bottles. The decision to produce the 250ml packets is informed by a market research conducted, which shows the majority of the consumers to be able to afford this. The production of the financial data requires uniformity and consistency in their presentation and hence the need for the assumptions lay down (Cagan 2007). a. Assumptions The users of the information herein should take note of the following assumptions; That the cost of sales figures to be used in the calculations is 45% of the identified sales figure. That the chosen cost of sales figure will be used to estimate the value of the variable cost; this is because the cost of sales figure entails the costs of direct labor, direct labor and all the direct overhead costs (Vance 2003). That the gross profit margin will be 55% of the sales figure when the cost of sales is estimated at 45%. That for the energy drink, the net profit value as a percentage of sales is estimated at between 12% to 18%. That the fixed cost will be estimated as the difference of the gross profit and the net profit figures. That the direct costs; both for materials and labor is estimated at between 22% to 27% of the sales figure. These assumptions are the basis upon which the financial data used in the preparation of the various cost statements are retrieved (Harrington 1985). b. Marginal costing The intentions of the proprietors are to invest in the production of the 250ml packets. This production will realize a production of 6000 units of the same drinks at a variable cost of $7. The fixed cost is estimated to sum up to $40000 a cost, which is not that high and the marginal costing technique, is used to arrive at the contribution. This technique is arrived at because it has the tendency of separating the variable from the fixed costs an act, which gives a clear view of the firm’s operations. A willing investor is therefore able to adjust the cost depending on their investment ideas and decisions. The selling price per unit of the drinks produced is estimated at $15 and this is also based on the assumptions stipulated above. At this selling price per unit, the contribution margin will be way of $ dollars signifying a great return on any investment made on this firm. The manufacturing overhead will be charged on the production figure in uniform proportions throughout the year (Kimmel, Weygandt & Kieso 2007). In using marginal costing in costing the prices of the product, variable costs will be considered. The variable cost of $7 is considered for the sake of penetration pricing upon which any minimum sale is the same as the variable cost (Harrington 1985). When the selling p[rice is set very low like in our case, the management normally gets worried about the prospects of recovering the fixed costs and they always want to see clearly on how they would arrive at the same hence the use of the variable costing technique. Such a cost is used in the calculation of the volume of sales at the fixed costs recovered and it will be used to determine whether profits will increase as well as the safety margin of the organization. Investors to make the required short-term decisions in the company can use the marginal costing techniques as outlined above. In addition, the marginal cost technique as outlined will be used by the investors as a basis of interpretation for the cost data hence a measure of profitability to the product and a cost center in the process of decision-making. The nature of the costs involved here propagated the use of this cost technique as it considers the behavior of costs and their effects towards the profitability of the company (Kimmel, Weygandt & Kieso 2007). The breakeven analysis as conducted in the firm is to enable the management inform the prospective investors of the profitability of the venture. It shows the level of sales revenue and units at which the firm cannot go at a loss. As it stands the sales revenue of the firm at breakeven is at $75000 and the corresponding units for this is 5000. Concerning the production of 6000, it means that the firm will still make worthwhile return from the sales of the extra 1000 units after the breakeven. At a sales volume of 5000 units and the set price of $15, the firm will be in the position of recovering its fixed costs of up to $40000. All the three financial statements right from the cash budget, projected profit statement and the projected balance sheet are all healthy. The cash budget from the projected figures indicates a consistency in the profitability of $667 throughout the 12 months of the year. In addition, this is very healthy considering that all the costs are taken care of. The income statement on the other hand indicates a continued profitability. After all the revenues and expenses are included, the business according to this statement still shows a recorded profitability of $1125 in all the months throughout the year. The sales revenue of the company is mainly from the sales of the drinks because the company still does not engage in any other business (Harrington 1985). The cost of goods sold is derived from the variable costs and entails both the material and labor costs. The projected balance sheet shows that the asset base of the company is quite strong. The company has prospects of growth in terms of its capital base and the shareholder’s ownership. This balance sheet is clearly indicative of the assets owned by the business and the state of its liabilities (Hampton 1976). The company does not require so much of the investor’s money as they are able to fund the business to a tune of $1000 and use the retained earnings of the business to a tune of $18335. Therefore, the only investment available for the investors will be in the form of small lending (Harrington 1985). Conclusion In line with all the merits that the company has and the opportunities it presents, any prospective investor must be informed that this is surely a good venture to engage their finances. This is because, it will cost them little money and the returns from the investment are recognizable (Hampton 1976). References Cagan, M, 2007, The everything accounting book: balance your budget, manage your cash flow, and keep your books in the black, Adams Media: Avon, Mass. Hampton, JJ, 1976, Financial decision-making: concepts, problems, & cases, Reston Pub. Co: Reston, Va. Harrington, DR, 1985, Case studies in financial decision-making, Dryden Press: Chicago. Kimmel, PD, Weygandt, JJ, & Kieso, DE, 2007, Financial accounting: tools for business decision making (4th ed.), John Wiley: Hoboken, NJ. Vance, DE, 2003, Financial analysis & decision making tools and techniques to solve financial problems and make effective business decisions, McGraw-Hill: New York. Read More