Financial Analysis of a New Company Introduction - Essay Example

? Financial Analysis and of the 0 Introduction The new company is intending to sell toothpaste and toothbrush products to consumers in the United Kingdom. However, the company is intending to locate its selling points at Manchester United, London and Birmingham. The company is targeting to sell its products to lower and middle-income individuals. The monthly sales growth of toothbrush and toothpaste is expected to grow at sales of ?100 and ?300 respectively for the first year. Although the market is characterized by a large number of toothpaste and toothbrush brands, the company expects its low-priced products to attract consumers with an intention of saving income. The company is also intending to manufacture natural toothpaste, which is expected to attract a large number of consumers considering that there is an increasing attention in regards to health issue. In this respect, the company expects its sales to grow consistently. 2.0 Target selling price and cost card The selling price of the company’s products is targeted to be low-priced relative to other similar products on the market. However, the company would take into consideration the costs associated with labor, raw materials, direct expenses and other variable costs, as well as fixed costs in calculating reasonable prices for both toothbrush and toothpaste. The use would use the marginal costing with an intention of calculating easily the break-even point (Siegel, & Shim, 2010). The company’s direct material cost for every product is expected to be ?0.15 and ?0.1 for toothbrush and toothpaste respectively. The direct labor cost is anticipated to be ?0.05 and ?0.1 for toothbrush and toothpaste respectively. Direct expenses are expected to stand at ?0.05 for every product. Other variable costs would also stand at ?0.05 for toothbrush and toothpaste. In addition, the company expects to experience fixed costs of ?400 and ?450 for toothbrush and toothpaste respectively. In this regards, the company’s total variable costs would stand at ?0.3 for each product. In an attempt to ensure the prices are not expensive, the company would seek a mark-up profit of 0.2 and 0.3 for toothbrush and toothpaste respectively. This would ensure that toothbrush and toothpaste are priced at ?0.5 and ?0.6 correspondingly. In relation to the market prices, the company’s prices would be slightly higher relative to Fluoridine Active Fresh of ?0.45 and Tubes High Quality of ?0.3. Conversely, it would be relatively lower with respect to Aquafresh of ?6 and Natural Paste of ?7. Additionally, the company’s toothbrush prices would comparatively lower to that of other firms on the market. 3.0 Breakeven point In order to calculate the breakeven point, there was a need to calculate the contribution margin per product using the marginal costing principle. In this regard, the company calculated the total variable costs, which was estimated at ?0.3 for each of the product (toothbrush and toothpaste). Moreover, the company subtracted the total variable costs for every product from the selling price to arrive at the marginal contribution for both toothbrush and toothpaste. Given that the selling price of toothpaste is ?0.5; its contribution margin per product is bound to be ?0.2. Similarly, considering that the selling price of toothpaste is ?0.6, then, the contribution margin per product would be ?0.3. For an individual to arrive at the breakeven point, one should calculate the number of products that may result in the profits of a firm being zero (Kieso, Weygandt, & Warfield, 2012). In this regard, it is estimated that 2,000 pieces of toothbrushes should be sold to meet the total fixed costs of ?400. On the other hand, it is expected that 1,500units of toothpastes should be sold to pay the total fixed costs of ?450. The company’s average contribution margin is estimated at ?0.25, while the total fixed costs are ?850. As a result, the company would breakeven by selling a total of 2,000 pieces of toothbrushes and 1,500 pieces of toothpastes. 4.0 Functional Budgets and Income statement The company expects to maintain the selling prices of both toothbrushes and toothpastes in the first year of business operation. However, the level of production and sales is expected to increase consistently every month for the first one year. For instance, the sales for toothbrushes are expected to increase by ?100 every month while that of toothpastes are anticipated to increase by ?300 every month. As a result, the variable costs are expected to increase steadily for the first twelve months (Braun, & Tietz, 2013). However, fixed costs and labor hours are expected to be maintained at the same rate every month for the first twelve months. The increase in the level of production and sales for the first one year is expected to be associated with increased efficiency and effectiveness arising from enhanced technology and continuous machine improvement. The firm’s level of production is, however, expected to stop increasing at the end of the year due to a number of limiting factors. The firm would not also be able to increase its level of production by increasing the labor hours since a total of 140 hours assigned for every product in a month is the best possible (Ross & Westerfield, 2013). Given that the company production is predicted to be at 46,800 units and 57,000 units for toothbrush and toothpaste respectively, production cost per unit is expected to be at 0.3 for each of the product (Flood, 2013). Considering that there is an anticipation of selling about 40,800 and 50,000 units of toothbrushes and toothpastes correspondingly, the production costs would stand at ?12,240 and ?15,000 respectively. The two production costs account for a total cost of ?27,240. Consequently, an estimated 6,000 and 7,000 units of toothbrushes and toothpastes respectively are expected to remain unsold. This accounts for a total of ?1,800 and ?2,100 for each of the two products (in order of toothbrushes and toothpastes). In respect to a price of 0.5 and 0.6 for toothbrush and toothpaste respectively, a total sale of 40,800 and 50,000 would amount to revenue of ?50,400. In order to arrive at the contribution margin, the total costs of production (?27,240) should be deducted from the total revenue of ?50,400. This would lead to a total contribution margin of ?23,160. A fixed cost of ?10,200 should be deducted from a contribution margin of ?23,160 to get a total budgeted profit of ?12,960. 5.0 Variance Analysis The variance analysis consists of the budgeted and actual figures. In this regard, sales were assumed to have increased by 5%, which resulted in total actual sales of ?52,920 as opposed to the budgeted ?50,400. This caused a decrease of ?520 with respect to sales revenue. In addition, the budgeted materials and other variable costs saw a decrease of 2%. This led to an actual material and other variable costs of ?12,465 and ?5,086 respectively. Summarily, material and other variable costs decreased by ?255 and ?4 correspondingly. Conversely, budgeted labor costs increased by 2.5% which saw it stand at an actual cost of 8241. On the other hand, fixed costs witnessed an increase from a budgeted cost of ?10200 to an actual cost ?10302. This was an increase of ?102. The increase in the level of budgeted sales may result from increased demand of the company’s products due to high quality and affordable prices (Morrell, 2013). The increased sales are also attributed to increased awareness about the firm’s products. The performance of the company’s products may have also led to increased demand, leading to an enhanced level of sales. The decreased level of the cost of materials is attributable to sourcing materials from cheap suppliers and increased efficiency in production. The decrease of other variable costs is as well attributed increased efficiency of production. However, the costs of labor increased as result of increased costs on the labor market, and increased demand for labors due to consistent increase in the levels of production. Fixed costs increased slightly to ?10302 as a result of increased costs of rent. 6.0 Limiting Factor Decision The following are the pertinent decisions as far as limiting factors are concerned: Original production capacity for toothbrush: 46,800 units. Demand increased by 15% 115%/100%*46,800 =53,820 units (new demand) Original production capacity for toothpaste: 57,000 units. Demand increased by 25% 125%/100%*57000= 71,250 units (new demand) Available labor= 90% Current yearly labor hours for toothbrush= 1680 Currently yearly labor hours for toothpaste= 1680 Total labor hours= 3360 hours Required hours to meet the total current demand= 100%/90%* 3360= 3733 hours. Toothbrush labor: Contribution per hour =(Total yearly sales ?23,400)/(Total yearly hours 1800)= ?13 per hour Toothpaste labor: Contribution per hour= Total yearly sales ?34,200)/(Total yearly hours 1800)= ?19 per hour Option: Allocate adequate hours to toothpaste production to meet the required demand. The additional hours on toothpaste production should be deducted from the labor hours of manufacturing toothbrush (Hoyle & Schaefer, 2013). Toothpaste current hours= 1680 hours 57,000 units =1680hours 71,250 units = 71,250 units/57,000 units* 1680= 2100 hours Additional hours for toothpaste to meet demand=2100-1680=420 hours New yearly labor hours assigned to toothbrush manufacturing= 1680hrs-420 hrs= 1280hrs. New yearly number of manufactured toothbrush with 1280 hrs, 1280hrs/1680hrs *57,000= 43,428 units New yearly number of manufactured toothbrush with 2100 hrs=71,250 units New yearly profits for toothbrush in absence of fixed costs= (43,428*0.2) =?8,685 New yearly profits for toothpaste in absence of fixed costs = (71,250*0.3) = ?21,375 Total yearly profits in the presence of fixed costs= (=?8,685 +?21,375-?10,200) = ?19860 From the above calculations, the total profit arising from changes with regards to labor hours is ?19,860. In relation to a profit of 12,960 prior to the changes in response to labor hours, it is evident that the profits increased by ?6,400. This significant increase in the level of profit is attributable to the considerable labor-hour contribution margin of ?19 for by toothpaste in relation to ?13 of toothbrush. 7.0 Conclusion The company is prone to experience high profits in the event that it embrace changes various changes in response to demand and limiting factor (Benth, 2013). However, the company should continue focusing on efficient methods of productions to ensure costs are minimized to the lowest levels possible (Hoque, 2013). In addition, the company experience continued increase in sales if marketing is initiated at an early stage of business operation. This would include physical and online marketing, as well as promotions. More importantly, the company should consider increasing the profit-mark of both toothpaste and toothbrush in the near future to ensure increasing costs of production are met effectively. List of references Benth, F., 2013. Paris-Princeton Lectures on Mathematical Finance 2013. Cham, Switzerland: Springer. Braun, K., & Tietz, W., 2013. Managerial accounting. Boston: Pearson. Flood, J., 2013. Wiley GAAP 2013: interpretation and application of generally accepted accounting principles. Hoboken, N.J.: Wiley. Hoque, M., 2013. Managerial Finance. Bradford: Emerald Group Publishing Limited. Hoyle, J., & Schaefer, T., 2013. Advanced accounting. New York, NY: McGraw-Hill/Irwin. Kieso, D., Weygandt, J., & Warfield, T., 2012. Intermediate accounting. Hoboken, NJ: Wiley. Morrell, P., 2013. Airline finance. Farnham, Surrey, England: Ashgate. Ross, S., & Westerfield, R., 2013. Corporate finance. New York, NY: McGraw-Hill/Irwin. Siegel, J., & Shim, J., 2010. Accounting handbook. Hauppauge, N.Y.: Barron's Educational Series. Appendix 1 Competitors and prices Competitor s Toothbrush prices in ?per piece Toothpaste prices in ?per piece Aquafresh 6 Professional whitening 2.5 Natural Paste 7.5 Remineralising Whitening 3 Tubes high quality 0.3 Fluoridine Active Fresh 0.45 BLANX 1.4 Club Cutie Wave 0.76 Wild Bunch Flashing 0.76 Wild Brunch Musical 0.96 Softening Whitening 22 Freshline Disposable o.6 Smile Saver disposable 0.5 Nano-Silver Whitening 1 Aquafresh 7 Appendix 2 Standard Cost card Standard cost card per unit Traditional Absorption Toothbrush (?) Toothpaste (?) Standard cost card per unit Marginal costing Toothbrush (?) Toothpaste (?) Direct materials o.15 0.1 Direct materials o.15 0.1 Direct labor 0.05 0.1 Direct labor 0.05 0.1 Direct expenses 0.05 0.05 Direct expenses 0.05 0.05 Other variable costs 0.05 0.05 Other variable costs 0.05 0.05 Fixed costs (per unit) 0.15 0.1 Total costs 0.45 0.4 Total variable costs 0.3 0.3 Profit mark-up 0.05 0.2 Profit mark-up 0.2 0.3 Selling price 0.5 0.6 Selling price 0.5 0.6 Appendix 3 Break-even point Toothbrush Toothpaste Company Fixed costs ?400 ?450 ?850 Contribution per unit ?0.2 ?0.3 Break-even point 2000 units 1500 units Average contribution ?0.25 Appendix 4 Operational Budgets – First year ? 1 2 3 4 5 6 7 8 9 10 11 12 Total year 1 SALES BUDGET Toothbrush S.P. per unit (?) 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 Total sales(?) 1400 1500 1600 1700 1800 1900 2000 2100 2200 2300 2400 2500 23400 Toothpaste S.P. per unit (?) 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 o.6 Total sales(?) 1200 1500 1800 2100 2400 2700 3000 3300 3600 3900 4200 4500 34,200 Var. Prod o’head budget(?) 820 950 1080 1210 1340 1470 1600 1730 1860 1990 2120 2250 Fixed Prod. O’head Budget (?) 450 450 450 450 450 450 450 450 450 450 450 450 5400 Prod. FA Dep’n Budget (?) 200 200 200 200 200 200 200 200 200 200 200 200 2400 Fixed Non Prod. (?) 400 400 400 400 400 400 400 400 400 400 400 400 4800 Other Budgets Capital exp Share issue 2500-Toothbrush Cost per unit (?) 0.20 0.22 0.24 0.26 0.28 0.30 0.32 0.34 0.36 0.38 0.40 0.42 0.42 2000-Toothpaste Cost per unit (?) 0.4 0.44 0.48 0.52 0.56 0.6 0.64 0.68 0.72 0.76 0.8 0.84 0.84 Mats Purch (?) Direct Lab. Budg Labor Hours- Toothbrush 140 140 140 140 140 140 140 140 140 140 140 140 1680 Rate(?) per hour 3 3 3 3 3 3 3 3 3 3 3 3 3 Units Toothpaste 140 140 140 140 140 140 140 140 140 140 140 140 1680 Rate( ?) per hour 2 2 2 2 2 2 2 2 2 2 2 2 3 Dir. Lab. (?) 700 700 700 700 700 700 700 700 700 700 700 700 8400 Appendix 5 Workings to support budget Income statement Production Costs ? Production costs ? Year 1 Toothbrush 46,800 units Toothpaste 57,000 units Direct materials 7020 Direct materials 5,700 12,720 Direct labor 2340 Direct labor 5,700 8040 Direct expenses 2340 Direct expenses 2850 5190 Other variables 2340 Other variables 2850 5190 Production cost per unit 0.3 Production cost per unit 0.3 0.3 Appendix 6 Production costs of goods sold (?) Production costs of goods sold (?) Total year 1 Toothbrush -40,800*0.3= 12,240 12,240 50,000*0.3 15,000 27,240 Production costs of good not sold Production costs of goods not sold 6000*0.3 1,800 7,000*0.3 2,100 3,900 Appendix 6: Income Statement Year 1 (?) Sales (20400+30,000) 50,400 Less cost of sales (variable) 27,240 Contribution 23,160 Fixed costs 10,200 Budget profit 12,960 Appendix 7 Variance Analysis Budget (?) Actual (?) Variance(?) Sales 50,400 52,920 -520 Materials 12,720 12,465 255 Labor 8040 8241 -201 Other Variable Costs 5190 5086 4 Fixed Costs 10200 10302 -102 Appendix 8 Limiting factor Toothbrush Toothpaste Selling price 0.5 0.6 Variable cost 0.3 0.3 Contribution per unit 0.2 0.3 Use of limiting factor (labor hr) 1800 hrs 1800hrs Contribution per unit of limiting factor 23400/1800= ?13 per hour 34,200/1800= ?19 per hour Rank 2 1 Optimal production 43,428 units 71,250 units Optimal contribution ?8,685 ?21,375 Read More