The Energy Drink of Champions - Essay Example

The Energy Drink of Champions Introduction Supa-E is the energy drink of champions. The expected date of introduction is December 16, 2012. The market requires a healthy alternative to those that currently exists and Supa-E will fill that requirement. The introductory price for Supa is expected to be £1.5 and will be packaged in 400ml plastic bottles. The market for energy drink is growing and Supa-E is expected to benefit from this growth. In fact, Nutricap Labs (2012) indicates that a survey carried out in 2009 indicates that energy drinks controls 51% of the Sports Nutrition and Weight Loss products market in 2007. The upcoming holiday season should find at least one Supa-E in every ten shopping carts and this should translate into large volumes. It is expected that sales will be higher in December. The Press Association (2011) indicates that the last few days of December before Christmas are the busiest shopping days. Supa-E is a new drink and it is expected that after sampling consumers will maintain a high level of interest. The ingredients are similar to that contained in Red Bull but it is tastier and healthier as the proportions of some of the ingredients such as guarana has been reduced. FactExpert (n.d.) indicates that guarana is one of the ingredients in some energy drinks. Supa-E will be packaged in plastic bottles. Plastic bottles are popular for packaging all types of drinks and food items and there are a number of reasons for this. These reasons include and are not limited to the following: Convenience - Plastic bottles are convenient to carry around because they are lighter than the alternatives available (British Plastics Federation n.d.) Recyclability – PET bottles are capable of being recycled and so it can be used several times Light weight - They are lighter to transport to retail outlets and therefore reduces the GHG emissions associated with transporting goods; Lower Cost - Plastic bottles are cheaper than all other alternatives The drink will be sold in 400ml bottles. It will be distributed to bars, grocery stores, supermarkets and hyper-markets. The distributors will be responsible for the in store promotion and launch of Supa-E. In terms of advertising a very prominent advertising firm has been engaged to produce the advertisement which will start airing a week before the launch of the product. A well recognised athlete will be engaged in our advertising campaign. Marginal Income Statement The marginal income statement which is provided in Appendix 1 shows the direct costs associated with the production of Supa-E. It also shows the contribution and fixed cost to produce the product. The statement combines the cost of direct material and labour. The reason for this is that the production of Supa-E has been outsourced. The only thing that is done in-house is the design of the labels and administrative activities such as accounting. Everything else is done by persons external to the business. The materials include the plastic bottle which is very cheap. The manufacturer uses the same bottle to package their products and so the price for each bottle is very low. In fact, if the bottle was purchased by the business it would cost two to three times more. The contribution per unit is more than two times the direct cost of the product. This means that it can provide a buffer when the market gets very competitive. This is good for times when sales are slow. Break-even analysis The break-even point represents the point where total cost is equal to total revenue (Horngren et al 2000). This is the point where the business neither makes a profit nor incurs a loss. This point is shown in the table in Appendix 2. The table indicates that the production of 644,905 units is required in order to break-even. Therefore, it is important that the product is properly advertised and promoted. The sales revenue and total cost to be incurred at the break-even point is £967,358. Cash Budget A cash budget is a very useful tool in accounting. It is used to determine whether there will be any shortfalls in cash ahead of time. It allows the firm to take the necessary steps to deal with eventualities such as these. The firm is then able to take the necessary steps to source funds beforehand. The cash budget shows expected cash receipts and disbursements as well as the balance of cash in hand at the end of each month (BPP 2011a). This allows for the necessary plans to be made to source funds if it becomes necessary. The cash budget relating to Supa-E is provided in Appendix 3. It shows the source of the funds for purchasing assets and to cover the cost of direct costs and other expenses. The expected disbursements are also shown under the section allowed for outflows. Additionally, the cash budget shows when the funds will be received and disbursed. Forecast Income statement An income statement provides information on the performance of a business (Wood and Sangster 2012). The forecast income statement shows the expected sales revenue and expenses for the twelve month period. It shows both cash and non-cash expenditure for the period and provides information on whether the business will make a profit or a loss. A gross profit margin of 70 per cent is anticipated. The statement shows that if sales volume is realised as planned, the revenue expected will be sufficient to cover expected and unexpected expenses. The net profit margin is expected to be 53 per cent. This is high for a new business and the importance of meeting targets and hiring a good marketing team cannot be overemphasized. Forecasted Balance Sheet A balance sheet which is also described as a ‘Statement of Financial Position’ provides a snapshot of the position of a business at a particular point in time (BPP 2011b). It is described as a position statement because it shows the financial standing of the business. It provides information on the value of the business its assets, liabilities and owners equity. A number of ratios can be calculated from this statement that can help investors to determine the liquidity of the business. Liquidity is an indication of whether the business will be able to pay its debts as they fall due (BPP 2009). It is represented by the current assets ratio. The current assets ratio is the ratio of current asset to current liabilities. The forecast balance sheet for Supa-E is provided in Appendix 5. It depicts a healthy financial position in relation to Supa-E. The current ratio for Supa-E is 25:1. This ratio is the normal test for short term solvency (BPP 2009). A more stringent measure which takes into account the length of time it takes to turn inventory into cash is the acid test or quick ratio. This ratio does not include inventory in its calculations. The quick ratio for Supa-E is 24:1. Both ratios are very high and suggest that if things happen as planned no liquidity problems will occur in the operations relating to production and sale of Supa-E. Conclusion Investors are encouraged to contribute to the success of Supa-E. Supa-E will not only provide superior benefits to customers who will consume the drink but superior returns to investors. The return on capital employed is expected to be 531% and the dividend payment to investors 20% which is a good return in the present economic environment. The liquidity ratios suggest that the business will be able to pay its debts as they fall due. Additionally, there are no long term debts at this time and the financial statement information shows that the business has the capacity to take on long term debt. The information from surveys indicates that an energy drink like Supa-E will be a great choice for consumers who want value for their money. It is anticipated that Supa-E will be on the shelves of American stores in the following year. The US is a big market for energy drink and so it is expected that sales will double. Additionally, the product will marketed in other countries in the European Union and this should give our product a tremendous boost. I encourage you to invest as it will also provide great value for your money. Please play a role in making Supa-E – the ‘Energy Drink of Champions’ a reality by making a worthwhile investment. References BPP (2011a). Paper F2 Management Accounting. London: BPP Learning Media BPP (2011b). Paper F7 Financial accounting. 5th ed. London: BPP Learning Media BPP (2009). Paper F7 Financial Reporting. 3rd London: BPP Learning Media British Plastics Federation. (n.d.). Pet Plastic Bottles- Facts not Myths. Available at http://www.bpf.co.uk/Sustainability/PET_Plastic_bottles_facts_not_myths_.aspx. Last accessed 24 Nov 2012 Horngren, C.T., Foster, G and Datar, S.M. (2000). Cost Accounting: A Managerial Emphasis. NJ: Prentice Hall Nutricap Labs (2012).Energy Drink Packaging trends for 2011. Available at: http://www.nutricaplabs.com/energy-drink-packaging-design-trends.aspx. Last accessed 23 Nov 2012 FactExpert (n.d.). Energy Drink Ingredients. Available at http://energydrinks.factexpert.com/880-energy-drink-ingredients.php. Last accessed 23 November 2012 Appendix 1 Supa-E Energy Drink Marginal Cost Statement Year Ending November 30, 2013 £ £ Direct materials and labour @ £0.40 ×3,000,000 units 1,200,000 Direct materials -Labels @ £0.04 ×3,000,000 120,000 Prime Cost/Manufacturing Cost 1,320,000 Less closing inventory @ £0.44 ×200,000 units 88,000 Manufacturing Cost of goods sold 1,232,000 Sales (£1.5 × 2,800,000) 4,200,000 Contribution (£1.06 × 2,800,000) 2,968,000 Less: Fixed cost Rent 30,000 Salaries 150,000 Advertising and promotion 500,000 Depreciation 3,600 683,600 Net profit 2,284,400 Assumption: The cost of material and labour is expected to remain stable during the year Appendix 2 Supa-E Energy Drink Break-even Table Break-even point Number of bottles sold 0 1 200,000 400,000 644,905 800,000 1,000,000 Sales @ £1.5 per bottle 0 1.5 300,000 600,000 967,358 1,200,000 1,500,000 Variable Cost @ £0.44 per bottle 0 0.44 100,000 176,000 283,758 352,000 440,000 Less: Contribution @ £1.06 per bottle 0 1.06 275,000 424,000 683,599 848,000 1,060,000 Fixed Cost 683,600 683,600 683,600 683,600 683,600 683,600 683,600 Total Cost 683,600 683,600 783,600 859,600 967,358 1,035,600 1,123,600 Appendix 3 Supa-E Energy Drink Cash Budget for December 2012 to November 2013     Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Total Inflow £ £ £ £ £ £ £ £ £ £ £ £ £ Owner's capital 30,000 0 0 0 0 0 0 0 0 0 0 0 30,000 Sales 405,000 345,000 345,000 345,000 345,000 345,000 345,000 345,000 345,000 345,000 345,000 3,855,000 Contribution from investors 400,000 0 0 0 0 0 0 0 0 0 0 0 400,000   430,000 405,000 345,000 345,000 345,000 345,000 345,000 345,000 345,000 345,000 345,000 345,000 4,285,000     Outflows   Deposit paid to- manufacturer 118,800 0 0 0 0 0 0 0 0 0 0 0 118,800 Manufacturer 0 101,200 101,200 101,200 101,200 101,200 101,200 101,200 101,200 101,200 101,200 101,200 1,113,200 Advertising and promotion 200,000 20,000 20,000 20,000 20,000 20,000 30,000 30,000 30,000 30,000 30,000 50,000 500,000 Labour 12,500 12,500 12,500 12,500 12,500 12,500 12,500 12,500 12,500 12,500 12,500 12,500 150,000 Rent 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 30,000 Capital expenditure 30,000 0 0 0 0 0 0 0 0 0 0 0 30,000 Dividends 40,000 40,000 Total Outflow 363,800 136,200 136,200 136,200 136,200 136,200 146,200 146,200 146,200 146,200 146,200 206,200 1,982,000 Net Inflow/(Outflow) 66,200 268,800 208,800 208,800 208,800 208,800 198,800 198,800 198,800 198,800 198,800 138,800 2,303,000 Cash b/f 0 66,200 335,000 543,800 752,600 961,400 1,170,200 1,369,000 1,567,800 1,766,600 1,965,400 2,164,200 2,303,000 Cash c/f 66,200 335,000 543,800 752,600 961,400 1,170,200 1,369,000 1,567,800 1,766,600 1,965,400 2,164,200 2,303,000       Assumptions:   1. Capital of £30,000 will be provided by owner to purchase van and office furniture.   2. Contribution of £400,000 will be made by investors   3. Steady production of 250,000 units per month is expected after the first month to meet monthly sales of 230,000 from January to November 2013.   4. A deposit of £118,800 will be paid to secure the manufacturing contract   5. A credit period of 30 days has been agreed with creditors   6. Office will be at home and £30,000 will be contributed towards the space and bills.   7. There will be two employees               Appendix 4 Supa-E Energy Drink Forecast Income Statement Year Ending November 30, 2013       £ £ Sales 4,200,000 Cost of sales   Add: Purchases 1,320,000   Less: Closing inventory 88,000     1,232,000 Gross Profit 2,968,000 Less: Expenses   Rent 30,000   Salaries 150,000   Advertising and promotion 500,000   Depreciation 3,600   Dividends 40,000     723,600 Net Profit       2,244,400 Assumption: The business is a new start up and there will be no tax in the first year of operation Appendix 5 Supa-E Energy Drink Forecast Balance Sheet Year ending November 30, 2013       Cost Accum. Dep. Net Book Value   Fixed Assets £ £ £   Motor Vehicle 24,000 3,000 21,000   Office Furniture 6,000 600 5,400     30,000 3,600 26,400   Current Assets   Inventory 88,000   Deposit 118,800   Trade Debtors 345,000   Bank 2,206,200     2,758,000   Current Liabilities   Trade Creditors 110,000   Working Capital 2,648,000   Net Assets 2,674,400       Financed by:   Capital:   Owner 30,000   Investors 400,000 430,000   Profit 2,244,400     2,674,400   Additional information:   1. The owner provided £30,000 and investors provided £400,000.   2. Office furniture is expected to have a useful life of 10 years and motor van 8 years. Read More