Break-Even Analysis of Moroccan Oil - Term Paper Example

Moroccan oil treatment This is an oil treatment for all types of hair. It is free from alcohol and has a patented weightless formula with no build up. The product softens thick unmanageable hair and restores shine and softens to dull lifeless hair. This product will help eliminate frizz, speed up styling time by 40% and also provides long-term conditioning to all hair types. Moroccan oil contains a unique but the best formula that strengthens brittle hair as it promotes healing to the hair (Salon-Savings.com, 2010). Ingredients Alpha-Isomethyl Ionone, Cyclopentasiloxane, Cyclomethicone, Butylphenyl Methyl Propional, Dimethicone, Argania Spinoza Kernel Oil (Argan Oil), Linseed Extract, D&C Yellow-11, D&C Red-17, Coumarin, Benzyl Benzoate, Fragrance Supplement. Revenue and Cost Sale of product: Revenue will mostly come from the sale of the product depending on the price that will be charged. Loan: Since it is a new product in the market its continued production will depend on the availability of capital. Thus loan from commercial banks form an integral part of it. Manufacturing Costs: Cost of raw materials which involve the ingredients makes up the manufacturing costs. Variable Costs: Since the product will be introduced in to the market for the first time, massive advertisement is required so as to inform the potential customers of its existence. Labor Costs: New employees are needed to market the product. Marginal Cost Statement Marginal costing refers to the accounting system whereby variable costs are charged to cost units and the fixed costs of the period written-off in full against the contribution (Globusa-Publishing, 2011). Sales Revenue   $20,000 Less Marginal Cost of Sales   Opening Stock (Valued @ marginal cost) $7,000 Add Production Cost (Valued @ marginal cost) $5,000 Total Production Cost $12,000  Less Closing Stock (Valued @ marginal cost) ($2,000)  Marginal Cost of Production $10,000  Add Selling, Admin & Distribution Cost $3,000 Marginal Cost of Sales  $13,000 Contribution  $7,000 Less Fixed Cost  ($2,000) Marginal Costing Profit $5,000 Break-even Analysis The Break-even Analysis helps in determining what one needs to sell, monthly or annually in order to cover the cost of doing business (Attard-Communications-Inc., 2010). Break Even Analysis: Monthly Units Break-even 200 Monthly Sales Break-even 1000 Assumptions: Average Per-Unit Revenue 250 Average Per-Unit Variable Cost 150 Estimated monthly Fixed Cost 580 Break-Even Chart Monthly break-even units Cash Budget Cash budget shows how cash flows in and out of a business (McLaney). Estimated cash balance at the beginning of the period $1000 Jul Aug Sep Oct Nov Dec Estimated Cash Inflows: Cash Sales 500 3000 1500 1000 1000 3000 Collection on Credit sales 200 100 300 100 200 100 Bank Loans 5000 Total Inflows 1700 8100 1800 1100 1200 3100 Estimated Cash Outflows Payment to Suppliers 2000 Payment of operating and 400 200 300 300 400 400 Other expenses Payment on bank loan and 5000 Interest Total Outflows 400 200 300 2300 400 5400 Balance 1300 7900 1200 (1200) 800 (2300) Forecast Income Statement Forecast income statement estimates the performance of a company in future (Tagetik, 2010). Dec. 31, 2010 Dec.31, 2011 Sales $20000 $30000 Cost of goods sold &10000 $15000 Gross Margin $10000 $15000 Operating Expenses Marketing Expenses $4000 $4500 Administrative Expenses $1000 $2000 Total Operating Expenses $5000 $6500 Income Before Tax $5000 $8500 Tax $500 $600 Income After Tax $4500 $7900 Forecast balance sheet Forecasting refers to the projection in the performance of a business to the following year (Tiger, 2010). Assets Cash $6000 Accounts Receivable $2000 Inventory $2000 Plant and Equipment $5000 Total Assets $15000 Liabilities and Capital Accruals $1000 Accounts Payable $5000 Total Liability $5000 Capital $10000 Total Liability & capital $15000 Report Introduction Moroccan oil treatment can be used by everyone irrespective of the age, gender or social background. Being that it protects hair from infections, the product is viewed to be consumer developed and thus it can attract several customers. The product not only protects hair from falling but it has several features some of which include strengthening of brittle hair and promoting its healing. Based on the ingredients that are used, most of them are not very much expensive. In view of this the profitability of the product is set to increase due to the reduction in operating cost. Revenue and cost Revenue mostly comes from the sale of the oil product. Large amount of sales that has been experienced in the last one year since its production shows clearly the projected sales that are expected in the future. Looking at the marginal cost of production, sales of the year 2010 were calculated to be $20,000. This means that in each month the expected sales are $2000. Total cost of production for the same year was $12,000, while the cost selling and distribution is $3,000. This shows that there is minimal cost incurred during the production process. As such, the main objective is to minimize these costs to a manageable level. Marginal profit during the year is $5000. Although the marketing of the oil product was not intensive due to inadequate funds especially for marketing the profits gained are better. Thus, if enough capital can be channeled towards the production and marketing of the product sales are expected to increase by wide margin. Labor costs in the same year which is constituted of salaries of the marketers are within the expected range. However more employees are needed to market the product both nationally and internationally to ensure increased performance of the product in the market. Break-even analysis From the break-even chart shown monthly break-even units are 200 units while monthly break-even sales are $1000. Therefore the yearly break-even sales are $12000. The average per unit variable is $1000. When calculated per year the average revenue is $12000 which is equal to the break-even sales per year. Average fixed costs per month are $580 which is very high being that the product is still new in the market. Extra funding therefore are needed to ensure that the product does not trade on losses. Cash budget, forecast income statement and forecast balance sheet Average performance in the six months period looking at the cash budget is fairly well except for the months of October and November where the balance was negative. The losses were attributed to payments that were made to the suppliers and the repayment of loans from the banks respectively. In view of these facts other sources of revenue are needed if profit margins are expected to increase. Investors need to provide capital for the business either through the provision of supplies or provision of funds. From the forecast income statement sales are expected to increase in the following year to $30,000. This is an increase by 1%. Cost of goods sold on the other hand increased to $15,000 which is a 0.5% increment. Hence the gross profit increased by 0.5%. This is commendable for a starting product. Income after tax increased to $7,900 and this is a 1.5% increase. The product is doing well in the market and only few adjustments especially in the cost minimization are needed. From the forecast balance sheet there is a significant increase in assets. The steady increase in cash may be attributed to the increased demand for the product. There is also a steady increase in the accounts receivable and this may be due to the increased number of debtors. As such the product is not deemed to fail because the available cash out do the accounts receivable. The capital of this is to increase $15,650 which is a good move for a new product. However more capital is needed in order to meet the target. Liabilities of the company are to be minimized so that the company can pay for its services. Conclusion From the report shown above and from the financial statements it is clear that product is doing very well in the market. Its uniqueness and its ability to protect the hair have made the customers to like it in the market. Even though there has been no massive advertisement the profits that have been gained in the last months are very high. To move to the next level a lot more need to be done on the quantity of production and marketing of the product. Hence this calls for investors to provide capital in order to meet the target. Work cited Attard-Communications-In Break-even Analysis. Retrieved April 12, 2011, from http://www.businessknowhow.com/startup/break-even.htm Globusa-Publishing. (2011). Marginal Costing and Absorption Costing. Retrieved April 12, 2011, from http://www.globusz.com/ebooks/Costing/00000012.htm McLaney, E. (n.d.). Retrieved April 12, 2011, from Prepare Cash Budget: http://www.va-interactive.com/inbusiness/editorial/finance/ibt/cash_bud.html Salon-Savings.com. (2010). Moroccanoil treatment. Retrieved April 12, 2011, from http://www.salonsavings.com/moroccanoil-treatment-085-floz/moroccanoil/ Tagetik. (2010). Income statement forecasts. Retrieved April 12, 2012, from http://www.tagetik.com/resources/glossary/income-statement-forecasts-profit-and-loss-forecasts Tiger. (2010). Financial Forecasting and Pro-Forma Statements. Retrieved April 12, 2011, from http://academic.uofs.edu/faculty/gramborw/tufinfor.html . Read More