The New Hair Product Gel - Case Study Example

RUNNING HEAD: Introduction to Accounting and Finance Introduction to Accounting and Finance – New Hair Product of of Professor Date Will the new hair product “Gel” be profitable and should investor take risks in pursuing the production and sale of the product? This and other questions will be answered and analyzed in this paper as latter seeks to explain the costing and financial data on the feasibility of Hair Gel Product. The task will be done using set of assumptions used, the prepared margin costing statement, breakeven analysis, and the prepared forecasts for cash budget, income statement and balance sheet for the first twelve months of producing and selling the said product. Variable cost of the product is assumed to be 30% of sales and this would mean a very high contribution margin of 70% and since fixed cost constitute about 30% of sales, a 40% net profit margin must be indeed some reveals an obvious profitability. The product will be sold to retailers and as such an average quantity of 100 units per month would something that is actually to too conservative to assume since the product is priced at a very competitive price of $10 per unit or per piece. Given the mentioned cost structure, a ready $4 dollar net profit is expected to be gain from every sale made. The assumed variable costs which consisted of the direct costs like materials, labor and overhead and selling and administrative expenses are within realistic bounds considering that packaging would not be too costly. A forecast income statement shows shows a uniform price and unit sales in order to simplify analysis although it may be assumed that in certain months that could be stronger demand than usual which is usually influenced by economic factors (Dornbusch, and Fischer,1990; Carroll, 1983). See forecast income statement worksheet. Sales revenues depend much on competitiveness of the price and this paper assumes that this could be attained as the volume of each produce units should be adjusted accordingly. Expenses that include the direct cost of materials, labor and overhead including the variable selling and administrative can be assumed to stay at 30% of sales considering that nothing much special about the source of raw material which is assumed to easily accessible from designated sources. It may be noted that the marginal statement provides that there are basically two nature of cost for decision making -- the variable and the fixed cost. The variable cost varies with production and it would mean that as the company increase production, it necessarily has to increase variable cost as well (Atkinson, et al, 2005). The excess of sales over the variable costs is the contribution margin which can expressed as contribution margin per unit of $7. Notice also that there are also fixed costs that must be incurred whether or not the business will not produce any product or goods. This would represent the cost of rent and depreciation of fixed assets to be used in the production of the Gel. These fixed assets would refer for example to the cost of the equipment that will be used in the manufacture of the product including the necessary equipment that will have to be used in selling and administrative functions. These items are subject to deprecation when their costs are allocated over the useful or expected life of said fixed assets. The relevance therefore of the contribution margin is to make sure that the decision maker recovers at least the fixed cost where there could be not profits or loss in order to breakeven (Atkinson, et al 2005). A break even analysis was prepared and that the new product will produce no profit but fixed cost will be recovered at 514 units. See Breakeven analysis worksheet. As to whether this level of quantity is attainable, this researcher believes that the product can be expected to sell at higher than present breakeven sales units. This would therefore mean a margin of safety (Atkinson, et al, 2005) of the proposed product (Atkinson, et al, 2005). When viewed in terms of forecast balance sheet, income statement, cash budget, the following findings surfaced: That the expected return on equity (ROE) and return on assets (ROA) of the new product on per annum basis are 13% and 3% respectively. From the point of investors, ROE should prevail of ROA (Droms, 1990)These two rates are also very important in making the decision whether the plan for the new product should be pursued or not (Droms, 1990; Bernstein, 1993). Using ROE, the same can be compared with the expected return on investment like the risk free rate (Brigham and Houston, 2002). See worksheet on forecast income statement and balance sheet. The cash budget also revealed that assuming the sales as projected will happen, about 70% of which in cash sales and remaining 30% will be collectible after 30ys from sale. See worksheet on cash budget. On the other hand the company will only have to be required to pay about 60% of accounts with creditors or accounts payable account 30 days after purchase. This should be therefore being giving the company a sign of efficiency since collection is faster than payment. By looking at the liquidity of the company in terms of the positive cash inflow from the cash budget on per month basis, it can be found this is acceptable since the company would be able to please creditors and the risk of bankruptcy will be minimized accordingly. By accepting therefore this proposal for new product, the investor is essentially accepting a chance to become wealthier again because of the capacity produce better profits. Note however that the requirement appear to ask questions only as to issues related in the short term. A longer planning horizon with analysis would have a presented a better situation for the company. This paper concludes new product Gel to be worth investing into although much will depend on the quantity to be sold in order to produce profits. The very low variable cost per unit produces a relatively high contribution margin. This would mean therefore that sales units are increased; therefore there would be more profits for the new product. Investors should be assured of a good probability of earning from the new product Gel. This analysis however looks at it only from a short-term point of view. Appendices: See attached worksheets in One Excel File References: Atkinson, Anthony, et al (2005). Management Accounting. New Jersey: Person Custom Publishing Bernstein, J. (1993). Financial Statement Analysis, Sydney: IRWIN Brigham, E. and Houston, J. (2002) Fundamentals of Financial Management, London: Thomson South-Western Carroll, Thomas (1983). Microeconomic Theory Concepts and Applications. New York: St. Martin Press Dornbusch, R. and Fischer, S. (1990). Macroeconomics. New York: McGraw-Hill Publishing Co, Droms (1990). Finance and Accounting for Non Financial Managers. England: Addison-Wesley Publishing Company Read More