Introduction to Accounting and Finance: ROAR - Essay Example

 ROAR, “Your Ultimate Energy Booster”, is an energy drink which is scheduled to hit the market this winter; on December 21, 2010. That is, the start of the Winter Season. In choosing this date, we hope to capture some of the usually high consumer spending that takes place during the Christmas season. People tend to buy on impulse and they may want to choose something new and different (which is what ROAR is), to help ‘lively up’ their Christmas or other parties. ROAR will be packaged in 400ml pet bottles. PET (polyethylene terephthalate) is normally used for fizzy drink bottles and oven-ready meal trays. It will be shaped somewhat like the ‘Coke’ PET bottle and will have a golden fiery look which will help to attract/draw customers to it. This type of packaging was chosen for its convenience, the fact that it is not breakable and in our mission to help protect the environment – its recyclability. According to information from the website wasteonline.org.uk, “Packaging represents the largest single sector of plastics use in the UK. The sector account for 35% of UK plastics consumption and plastic is the material of choice in nearly half of all packaged goods.” Information on this website further state: “The considerable growth in plastic use is due to the beneficial properties of plastics. These include: “Extreme versatility and ability to be tailored to meet very specific technical needs; lighter weight than competing materials, reducing fuel consumption during transportation; extreme durability; resistance to chemicals, water and impact; good safety and hygiene properties for food packaging; excellent thermal and electrical insulation properties; and relatively inexpensive to produce.” The ingredients that it will contain is suitable for all persons. So, even though we will want to target sports men and women, we want to ensure that any individual who needs something to boost their energy will find comfort in having ROAR. The ingredients will be tested for any side effects by a biochemist, and a dietician will be advising us on what is good for certain groups of individuals. This is being done to ensure that ROAR is safe for everyone: whether pregnant or lactating mothers; diabetics, persons with high or low blood pressure, will be able to consume ROAR within limits. It will include ingredients that are good for the nerves, the brain, and for energy. It will also include ingredients rich in vitamins and minerals. Some of these ingredients include bee pollen and ginseng. In addition to the list of ingredients contained in ROAR, there will also be information on its nutritional content and the suggested serving size. The sugar content in this 400ml PET bottle will be somewhere between 10 and 15g, because we want everyone to enjoy the added vigour it brings to their lives. The Marginal Costing Statement (Appendix 1) This statement shows the direct cost associated with the production of each 400ml bottle of ROAR Energy Drink. It cost £1.04mn to produce 2.8mn bottles of ROAR at a unit cost of 40p per bottle. 30p of the 40p relates to the manufacturing cost and 10p for the PET bottle. This includes the cost of the design. Because of the specifications of our bottle and the design required, it was more convenient to purchase it ourselves instead of allowing our manufacturers to provide that service. Direct material and labour cost includes distribution. Our manufacturers have offered to provide the service for us at no additional cost. All other costs are assumed to be fixed. Breakeven Table The break-even table in Appendix 2 shows information on the sales revenue, fixed cost (which remains constant over the relevant range), variable cost, total cost and contribution to fixed cost. The business breaks even when contribution is equal to fixed cost and total cost is equal to total revenue. (See section coloured blue in the Table.) At that level of production, the business neither makes a profit nor a loss. This does not suggest that the business should close if it cannot cover its fixed cost. Once it is making a contribution to fixed cost then it makes sense to produce in the short term. The business breaks even when it produces 463,636 400ml bottles of ROAR. Losses are made when production levels for the year are below that quantity and profits are made at production levels above 463,636 units of ROAR. The Break-even Chart The break-even chart which is also in Appendix 2 shows the same information as the table but in a form that is easier to see. It shows the location of the break-even point in quantities (464,636 bottles of ROAR) and the value of sales (£695,454) at that point. At the break-even point total cost is equal to total revenue and so total cost is also £695,454 as indicated above. Additionally, the chart indicates the quantities where production is unprofitable and the quantities at where it is profitable. According to Horngren et al. (2000 p303), “Breakeven occurs when the target operating income is $0”. The chart also shows what is described as the margin of safety (the area above the break-even point). What this implies, is that once quantities greater than 464,636 bottles of 400ml ROAR are produced, the business will be profitable. At production levels below the break-even point (that is 464,636 bottles of 400ml ROAR or lower) the business will make losses. The fixed cost line indicates that fixed cost remains the same over the relevant range. The chart has a key to the right which indicates the different colour lines on the chart and what they represent. The yellow line represents the fixed cost, the blue line total revenues and the red line total cost. The chart was generated in Microsoft Excel 2003 version. The Cash Budget The cash budget in Appendix 3 shows the projected cash receipts and cash payments for the period. There are a number of assumptions that have been made in terms of quantities sold and the timing of these receipts. Based on the quality of ROAR, we expect to meet these targets. We are hoping that we will be forced to revise it, in a positive way, after the first quarter. The timing of our receipts is to facilitate out distributors who pay at certain times during the month. We expect that they will pay in 30 days of receiving the product; therefore, there will be no receipts in December based on our start up date of December 21, 2010. In terms of the payments, we do not expect to go beyond the credit period. Our advertising and promotion expenses as well as rent will be paid at the start of every month. It should be noted that depreciation expense does not involve the movement of cash and so it is not included in the cash budget. Capital expenditure relates to the expenditure on the office furniture and the motor van while the deposit paid to the supplier is to be used to access raw materials for the production of ROAR. Projections show that the business will have positive cash flows from as early as January 2011 and healthy cash balance £2.08mn at the end of the period. Forecast Income Statement The Forecast Income Statement in Appendix 4 indicates that the projected sales revenue for the period is £3.75mn. This suggests that 2.5mn units will be sold at a price of £1.50. Our suggested price in the supermarkets will be £2 per 400ml bottle of ROAR. We expect returns on sales as follows: Gross Profit Margin: Gross Profit/ Sales ×100% = 2,750,000/3,750,000 × 100% = 73.33% Net Profit Margin: Net Profit/Sales × 100% = 2,262,000/3,750,000 × 100% = 60.32% These profit margins are exceptional and projections are for a profitable venture. The fact that we have chosen to outsource the manufacture of ROAR will provide us with a great advantage. If we produce ROAR ourselves we would have to rent space for manufacturing, storage and our staff costs would be much higher. The projections also show that our investors would receive a return of 20% (30,000/150,000 × 100%) on their money. This is far more than the banks offer right now. Forecast Balance Sheet The forecast balance sheet in Appendix 5 shows assets of £25,000. This includes a motor van which will be used in the promotions and furniture for the office. I will be operating from home and so there will not be any need for much office furniture. The net book value of out fixed assets on December 31, 2010 will be £22,000 as depreciation of £3,000 will be charged. The current asset ratio is expected to be: Current ratio: Current assets to current liabilities = £2,500,000: £80,000 = 31.35: 1 The projected working capital which shows the ability of the business to pay debts as they fall due is expected to be £2,420,000. The figure is the difference between current assets (£2,500,000) and current liabilities (£80,000). This indicates that the current financial position of the business is strong. The projected value of the business on December 31, 2010 is £2.44mn. Distribution, Advertising and Promotions In any business that involves the sale of products, distribution, advertising and promotion are crucial to its success. ROAR Energy Drink will be distributed in and around London in all the major supermarkets. Our distributors already have the contacts and will be making deliveries along with their own products. Advertisements will be shown on all major channels during prime time. We have secured a major deal with a very effective and influential advertising agency and so we expect that our advertisements will be effective. Our distributors will be assisting with our promotions, so whenever they are promoting their products they will also promote ours. Customers will therefore get a chance to taste ROAR on these and other important occasions. Conclusion ROAR is the product that we will all be craving this season. It is extremely light and refreshing but it’s packed with power. There are no side effects. As with all of the foods we eat, overeating can be harmful, and so it is with ROAR Energy Drink. We encourage you to boost your energy with ROAR and give the returns on your annual investments a boost by investing in its production. ROAR as you have seen is a very profitable venture and I know that you will not regret it. Invest in ROAR - “Your Ultimate Energy Booster”. I am confident that you will indeed “feel the vigour that it adds to your life”. Appendix 1 ROAR Energy Drink Marginal Cost Statement Year ending December 31, 2011 £ £ Direct Materials and Labour @ £.30 ×2,600,000 units 780,000 Direct Materials -bottles @ £0.10 ×2,600,000 260,000 Prime Cost/Manufacturing Cost 1,040,000 Less closing inventory @ £0.40 ×100,000 units 40,000 Manufacturing Cost of goods sold 1,000,000 Sales (£1.5 × 2,500,000 units) 3,750,000 Contribution (Sales - Variable Cost) 2,750,000 Less: Fixed Cost Rent 25,000 Salaries 100,000 Advertising & Promotion 300,000 Entertainment 25,000 Depreciation (non cash exp.) 60,000 510,000 Profit 2,240,000 Assumptions: 1. 2,600,000 units will be produced at a total cost of £1,040,000 2. Production will occur evenly i.e. 200,000 units per month. 3. The first financial year will consist of 376 days. 4. Sales will be spread evenly over the period and only 100,000 units will be sold in Dec. 5. Closing stock will be 100,000 units. Appendix 2 Break-even Analysis ROAR Energy Drink Break-even Table Break-even point Number of 400ml bottles sold 0 1 250,000 463,636 500,000 750,000 1,000,000 Sales @ £1.5 per bottle 0 1.5 375,000 695,454 750,000 1,125,000 2,000,000 Variable Cost @ £0.4 per bottle 0 0.4 100,000 185,454 200,000 300,000 1,200,000 Less: Contribution @ £$1.10 per bottle 0 1.1 275,000 510,000 550,000 825,000 1,100,000 Fixed Cost 510,000 510,000 510,000 510,000 510,000 510,000 510,000 Total Cost 510,000 510,000 610,000 695,454 710,000 810,000 1,710,000 Break-even Chart Note: The margin of safety lies anywhere above and to the right of the break-even point. The lines are not straight because of the quantities used to plot the lines Appendix 3 ROAR Energy Drink Cash Budget Year to December 31, 2011 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Total Inflow £ £ £ £ £ £ £ £ £ £ £ £ £ Capital 30,000 0 0 0 0 0 0 0 0 0 0 0 0 30,000 Receipts from Sales 150,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 3,450,000 Receipts from investors 150,000 0 0 0 0 0 0 0 0 0 0 0 0 150,000 180,000 150,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 3,630,000 Outflows Deposit to Manufacturer 80,000 0 0 0 0 0 0 0 0 0 0 0 0 80,000 Manufacturers 0 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 960,000 Advertising & Promotion 60,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 300,000 Labour 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 130,000 Rent 1,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 25,000 Capital expenditure 25,000 0 0 0 0 0 0 0 0 0 0 0 25,000 Dividends 0 30,000 30,000 Total Outflow 176,000 112,000 112,000 112,000 112,000 112,000 112,000 112,000 112,000 112,000 112,000 112,000 142,000 1,550,000 Net Inflow/(Outflow) 4,000 38,000 188,000 188,000 188,000 188,000 188,000 188,000 188,000 188,000 188,000 188,000 158,000 1,922,000 Cash b/f 0 4,000 42,000 230,000 418,000 606,000 794,000 982,000 1,170,000 1,358,000 1,546,000 1,734,000 1,922,000 2,080,000 Cash c/f 4,000 42,000 230,000 418,000 606,000 794,000 982,000 1,170,000 1,358,000 1,546,000 1,734,000 1,922,000 2,080,000   Assumptions: 1. Initial capital of £30,000 will be provided. £20,000 to purchase a Van and £5,000 for Office Furniture. 2. Willing investors will be found to contribute £150,000 in return for a return of 20% per annum. 3. With the exception of the month of December, sales for the period is expected to be steady throughout the months. 4. A deposit of £80,000 will be paid to the manufacturers to secure the contract. 5. Creditors (manufacturer of ROAR and PET bottle designer and producer) will allow 30 days credit. 6. Office will be at my home and a contribution of £25,000 will be made for space and utilities. 7. I will be the only worker for now with responsibilities for purchasing and quality control. 8. Production will take place one day per week and so it will only be away from my office on that day. 9. The product will be promoted in supermarkets and at various events in and around London in December. 10. Supermarkets will be allowed a 30 day credit period. Appendix 4 ROAR Energy Drink Forecast Income Statement Year ending December 31, 2011 £ £ Sales 3,750,000 Cost of sales Add: Purchases 1,040,000 Less: Closing inventory 40,000 1,000,000 Gross Profit 2,750,000 Less Expenses Rent 25,000 Salaries 130,000 Advertising & Promotion 300,000 Depreciation 3,000 Dividends 30,000 488,000 Net Profit 2,262,000 Asumptions: 1. Two weeks of inventory amounting to 100,000 bottles of ROAR will be in stock at the end of every month. 2. Depreciation does not involve an outflow of funds 3. Sales relate to 2,500,000 bottles of ROAR at a price of $1.5 per bottle. Appendix 5 ROAR Energy Drink Forecast Balance Sheet Year ending December 31, 2011 Cost Accum. Dep. Net Book Value Fixed Assets £ £ £ Motor Vehicle 20000 2500 17500 Office Furniture 5000 500 4500 25000 3000 22000 Current Assets Inventory 40000 Deposit 80000 Trade Debtors 300000 Bank 2080000 2500000 Current Liabilities Trade Creditors 80000 Working Capital 2420000 Net Assets 2442000 Financed by: Capital: Owner 30000 Investors 150000 180000 Profit 2262000 2442000 Additional information: 1. The owner invested 30,000 by way of cash. See cash budget 2. Depreciation of Office Furniture is at 10% per annum and Motor vehicle 12.5%. References Horngren, C.T., Foster, G., Datar, S.M. (2000). Cost Accounting: A Managerial Emphasis. 10th ed. New Jersey: Prentice Hall. 303. Wasteonline (2006). Plastic Recycling Information Sheet. Available: http://www.wasteonline.org.uk/resources/InformationSheets/Plastics.htm . Last accessed 28th November 2010. Read More