Proper Sales Forecasting for Island Wheels - Example

Running header: Island Wheels Student’s name: Instructor’s name Subject code: Date of submission: Introduction It is important for manufacturing companies to maintain optimum amounts of raw material stocks. This will enable the company to minimize the costs associated with either holding too much stock or even too little stock. Furthermore, the company will avoid the inconveniences associated with keeping of inadequate stock such as stoppage of production when the company runs out of raw materials. However, the ability to keep adequate stocks is directly related to the ability to do proper sales forecasting. This will ensure that the company is able to adequately service the demand for its products at any given time without tying too much capital in the stock. There are a number of factors that the company should consider when doing its sales forecasting as will be explained below. The factors include the firm’s capacity to produce the projected amounts of sales, the financial capacity, the competitive environment within which the company operates the prevailing economic conditions and seasonality of demand among other factors (Japheth, 2008). As will be seen in the case of island wheels, financial considerations are vital in deciding whether to start production of a component or not. Similarly, financial considerations play an important role in making make or buy decisions for certain components. However, as in the case of Island wheels limited, the make or buy decisions should also be based on other qualitative factors including the quality they want to achieve, the convenience of making or buying own seat posts, the availability of production capacity as well as the resources required and the need to establish a core competency among other factors. This report looks at various issues affecting Island Wheels limited including the amount of raw materials to purchase, sales forecasting and make or buy decisions. The amount of materials (steel alloy, aluminum alloy and titanium alloy) to be purchased for the months of October, November and December Total number of bicycles to be manufactured October November December January February March Road 1600 1400 1800 1200 1300 1200 Trek 800 900 1200 1000 1100 940 BMX 300 300 500 260 300 400 Total 2700 2600 3500 2460 2700 2540 Amount of aluminum required But: Aluminum Road= 650g/ bike Trek = 350g/bike BMX = 250g/bike Hence; October November December January Road 1600*0.65= 1040kg 1400*.65 = 910kg 1800*0.65 = 1170kg 1200*0.65= 780 kg Trek 800*350g =280kg 900*0.35 = 315kg 1200*0.35= 420kg 1000*0.35= 350kg BMX 300*0.25= 75kg 300*0.25 = 75kg 500*0.25 =125kg 260*0.25= 65 kg Total Requirement 1395 kg 1300kg 1715 kg 1195 kg add 130 kg 171.5kg 119.5 kg Less 130kg 130kg 171.5 kg Total requirements 1395kg 1342 kg 1663 kg Price 380 380 380 Total amount $530,100 $509,960 $631,940 Amount of Steel alloy required Road 50gms Trek 200gms BMX 750 gms October November December January Road 1600*0.05 =80kg 1400*0.05 =70kg 1800*0.05 =90kg 1200*0.05 =60kg Trek 800*0.2 =160kg 900*0.2 =180kg 1200*0.2 =240kg 1000*0.2 =200kg BMX 300*0.75 =225kg 300*0.75 =225kg 500*0.75 =375kg 260*0.75 =187.5 Total 465kg 475kg 705kg 447.5kg Add 23.75kg 35.25kg 22.375kg Less 24kg 23.75 35.25kg Total production requirement 465kg 487kg 692kg Price $250 $250 $250 Total amount $116,250 $121,750 $173,000 Amount of Titanium required Road 150gms Trek 450gms October November December January February Road 1600*0.15 =240kg 1400*0.15 =210kg 1800*0.15 =270kg 1200*0.15 180kg 1300*0.15 =195kg Trek 800*0.45 =360kg 900*0.45 =405kg 1200*0.45 =540kg 1000*0.45 =450kg 1100*0.45 =495 kg Total 600kg 615kg 810kg 630kg 690kg Add 283.5kg 220.5 241.5 Less 25 283.5 220.5 Total requirements 859kg 552kg 831kg Price $720 $720 $720 Total amount titanium $618,480 $397,440 $598,320 Factors that Damian needs to consider when preparing a sales forecast; i) The firms capacity- in preparing the sales forecast, Damian will need to consider whether the company has the capacity to produce the bicycles needed to reach the sales amount in a given period. In other words, Damian needs to consider what the maximum capacity the company could produce from projected resources. For instance, supposing the company’s capacity is 3,000 bicycles per month, then the sales capacity would be limited to this level unless the company takes steps to expand the capacity. In addition, you may have adequate machinery but may have failed to include additional staff costs while with the current numbers; you are only able to produce up to a certain number. If for instance you are able to only work for 40 hours a week, the company’s capacity would be reached at the expected output for 40 hours with the staff numbers you have and hence the company’s sales forecast may not exceed this level. ii) The competitive environment – in preparing the sales forecast, Damian needs to consider the competitive environment within which the company operates. It is important to keep watch at the company’s competitors. Have there been new competitors or new products new competitors or products will for instance imply that the company’s sales may decrease unless an aggressive marketing campaign is undertaken (Edmond, 2010). If current competitors are expanding their own marketing efforts or i9ncreasing their product base, these action may eat into the company’s customer base and hence it needs to be put into consideration in preparing the sales forecast. iii) Seasonality of demand- in preparing the sales forecast, Damian will have to consider the seasonality of demand for the bicycles in the markets that the company serves. For instance, there could be times of the year when demand will be greater than in other times. For instance, during Christmas, summer or even tourist seasons, the demand for bicycles may be more than in other times. As such, the sales forecast must be such that it considers the increased demand at these times while still considering the capacity of the company to meet the demand at these times. On the same note, Damian should also consider the general trend in preparing the sales forecast. How has the sales performed over the years, have sales been increasing or declining? If there is a general upward trend and from market research, then Damian can expect that the sales will continue increasing in the coming period. iv) Economic conditions- Damian needs to consider the prevailing economic conditions in the markets in which the company operates. This is because a growing economy is an indication of prosperity and consumers will most likely not hesitate to buy the bicycles being sold by the company. It should also be noted that the local economy within which the company operates will also greatly affect the sales forecast for the product. In this regard, Damian will need to review the economic and industry trends against the company’s past performance in preparing the sales forecast. It is also important to consider what the expert s predicts concerning the economy as well as the bicycle making industry. Break-even point Fixed costs include the following cost Amount Renting Mechatron $450,000 Supervisor $85,000 Production staff $55,000 Fixed overhead costs $46,200 Total cost $636,200 Variable costs cost Amount materials $25.70 Variable overhead cost $14.30 Variable marketing cost $2.00 Variable packaging costs $5 Total $47 BEP IN Sales Units X = FC/ (P-V) Where FC = Fixed costs P= Price per unit V = variable cost per unit X = the number of units FC = Total fixed cost X = 636,200/ (65-47) = 35,345 Units The break even in units is 35,345 units. These will be sold at a cost of $65 per unit. As such, the equivalent break-even point in cash is 35,345*65 = $2,297,425. It is expected that the company will be able to sell 3,000 units everymonth. This is 36,000 units annually which will generate revenue of $65* 36,000. = $234,000. This implies that the entire Helmet project will generate a profit of $42,575 assuming that the company will be able to sell all the units at the price of $65 per unit and provided all the other conditions do not change. Based on the above information therefore as well as the calculations above, Island Wheels should proceed with the proposal of introducing the new Helmets. This is because it will be profitable to the company as explained above. Whether financially, Island Wheels should go ahead and produce the seat posts Current expenses on seat posts are given by; Current purchase price per seat * current annual production = $76 * 3500 =$266,000 Cost of manufacturing own seat posts; Direct materials for 3,500 posts = $161,000 Direct labor = $52,500 Variable manufacturing overheads= $ 52,500 Total variable costs = $266,000 Fixed manufacturing overheads = $ 26,250 Manufacturing costs $292,250 General and administrative overheads= $15,750 Total cost $308,000 Per Unit Total Make Buy Make Buy Purchase price $76 $266,000 Direct material $46 $161,000 Direct labor $15 $52,500 Variable overheads $15 $52,500 Fixed overheads $7.5 $26,500 Total relevant costs $83.5 $292,500 Difference in favor of buying $7.5 $26,500 Based on the financial information, it would be advisable for the company to continue buying the seat posts. This is because buying is cheaper with $7.5 per unit of seat post or $26,500 for the 3500 seat posts monthly requirement. In arriving at the buy decision, it has been assumed that the general and administrative cost is irrelevant in making the decision. This is because the 3500 seat posts required monthly would have to be stored whether they are made within the company or purchased elsewhere (Jerry,2012). Therefore, since this is assumed to be a common cost, it is not considered as relevant for making the decision on whether to continue buying the seat posts or to start making own seat posts. Factors to consider, other than financial, in deciding whether to produce helmets and seat posts; In deciding whether to make own seat posts or buy from suppliers, Island Wheels ought to consider some qualitative factors on top of the financial consideration as per the calculations above. These factors include the following; i) Quality –despite the findings above that the company should continue buying seat posts as opposed making for itself, the company could decide to startproducing its own seat posts based on quality. If the company will be able to create seat posts that are of better quality than what they have been buying from the market, then the company could decide to go on with the project of producing its own seat posts. However the company would then be forced to charge a price high enough to justify the materials and labor consumed. On the other hand, the company can opt to buy the seat posts from suppliers even if this would be a more expensive option if the suppliers are able to supply a better quality than that which the company would make. ii) Convenience – the company should also consider the convenience of either buying or making own seat posts and choose themost convenientoption. For instance if the company always operate in high gear in a bid to meet ongoing demand, then it will be more convenient to make the hot seats as opposed to buying them. However, if the supplier making the seat posts for the company is stationed in a foreign country and is unable to deliver the seat posts on short notices, the company will find it more convenient to make the seat posts though the cost of making them may be more than that of buying them (Ray, 2011). How convenient to make or buy the seat posts will of course vary relative to the volume of the business the company transacts currently as well as the amount of surplus labor and space the company may have. If these factors are limited, then the company will opt to buy the seat posts as opposed to making them. iii) Availability of production capacity and the required resources – the availability of production capacity as well as the resources that are required for producing the seat posts will also determine whether to make or buy the seat posts. The lack of sufficient production capacity will trigger the company to adopt a buy decision as opposed to making the seat posts. It is the non-availability of the capacity that will stimulate the company to visit or revisit the make or buy decision. This will give the company a chance to re-evaluate strategic and technological factors while realigning their sourcing strategies with their overall business strategy. Similarly, whether or not the company will be able to easily access the raw materials required for producing the seat posts will be a determining factor on whether the company makes or buys the seat posts. iv) Core competency- the company could still decide to go on with making its own seat posts if it intends to establish its core competency in this area. The need to establish a core competency in a certain area is an issue that often decides the strategic or non-strategic nature of the components that the manufacturer makes. In this case, the company might want to start making its own seat posts to make it a unique core competency in comparison to the companies it competes with. For instance, Honda Company has over the years continued producing its engine and power train design and manufacturing as they are considered part of the company’s core competence (Larry, 2013). Similarly, if Island Wheels deems it necessary to establish its core competence in this area, it will decide to go on with the project. Otherwise, the cost considerations and other factors may take precedence. Conclusion This paper has looked at the amount of materials that are required by Island Wheels limited for the months of October, November and December. Proper sales forecasting has been found important in order to avoid the extra costs that come with either holding too much stock or even too little stock as well as the inconveniences by way of interrupted production when the company goes out of stock. However, in doing sales forecasting, the company ought to consider various factors including the firm’s capacity to produce the projected amounts of sales, the financial capacity, the competitive environment within which the company operates the prevailing economic conditions and seasonality of demand among other factors. The paper has also analyzed the decision whether to start producing Helmets and seat posts. It has been recommended that the company should go on and produce the helmets. However, based on financial analysis, it has been recommended that the company should not go on with the production of seat posts. However, in making the final decision on whether to produce the seat posts or not, the company needs to consider other factors including the quality they want to achieve, the convenience of making or buying own seat posts, the availability of production capacity as well as the resources required and the need to establish a core competency among other factors. It is hoped that based on these factors, the company can make an informed decision regarding whether to produce or buy the seat posts. References: Japheth, M2008, Cost and management accounting, London, Rutledge. Edmond, K2010, Financial and management accounting, Sydney, Prentice Hall. Jerry, W2012, Managerial accounting: Tools for business decision making, New York, John Willey & Sons. Ray, G2011, Managerial accounting, New York, McGraw-Hill. Larry, M2013, Introduction to managerial accounting: Managerial and cost accounting, London, Rutledge. Read More