JP Computer Accessories - Coursework Example

JP Computer Accessories JP Computer Accessories was incorporated on October 01, as a private enterprise. It sells computer accessories to itscustomers and its major products include; Printers, Scanners, Ink Cartridges and USB Flash Drives. The firm purchases the components from the suppliers and then assembles and packages them into the respective product categories. Currently, the firm is operating at a small scale and it needs to extensively advertise its products to generate sufficient demand. The firm has hired 9 employees based on daily wages and a general manager with a fixed salary to manage the business. Variable Costs Printer Component Cost $18 per unit Labor Cost $12 per unit Energy used in the production (Utility Cost) $4 per unit Total Cost per Unit $34 per unit Scanner Component Cost $15 per unit Labor Cost $11 per unit Energy used in the production (Utility Cost) $3 per unit Total Cost per Unit $29 per unit Ink Cartridge Component Cost $4 per unit Labor Cost $3 per unit Energy used in the production (Utility Cost) $1 per unit Total Cost per Unit $8 per unit USB Flash Drive Component Cost $2 per unit Labor Cost $2 per unit Energy used in the production (Utility Cost) $1 per unit Total Cost per Unit $5 per unit JP accessories buy its components for each of the products from different suppliers. While the employees were hired on daily wage basis and they are remunerated on per hour basis. The cost of energy is also variable since the energy used in production varies with number of units produced in each category. Fixed Costs Since the place where the business is being conducted is rented therefore it will be fixed for the next year. All the capital equipments were bought through operational lease basis therefore a lease payment is also due on the company. In addition to that, the business has planned to extensively advertise its product throughout the next year which is also a fixed cost for them. The manager is also paid a fixed salary each month. The table provided below shows that how much fixed costs are incurred each month by JP Accessories: Rent Expense $7,000 Lease Expense $3,000 Advertisement Expense $5,000 Administrative Expense (Manager’s salary) $5,000 Total Fixed Costs $20,000 2) Month Total Output October 800 November 1200 December 1600 January 2000 February 2400 Since the business will emerge over the period of time we assume that the total sales unit will grow by 400 units in each month. However, the growth will remain stable in the long term. We assume that 35% of the sales come from Printers, 25% from Scanners, 30% from Ink Cartridges, and 10% from USB Flash Drives Month Output (Printers) Output (Scanners) Output (Ink Cartridges) Output (USB Flash Drives) October 2010 280 200 240 80 November 2010 420 300 360 120 December 2010 560 400 480 160 January 2011 700 500 600 200 February2011 840 600 720 240 Prices Product Price Printer $50 Scanner $45 Ink Cartridge $13 USB Flash Drive $8 Break Even Point: Total Revenue = (50 x 0.35Q) + (45 x .25Q) + (13 x .30Q) + (8 x .10Q) = 33.45Q Total Variable Cost = (34 x 0.35Q) + (29 x .25Q) + (8 x .30Q) + (5 x .10Q) = 22.05Q Total Fixed Costs = $20,000 Total Cost = 22.05Q + 20,000 At the Break Even Point Total Revenue = Total Cost 33.45Q = 22.05Q + 20,000 Q = 20,000 / 11.40 (Total Output) Q = 1754.36 Units As we know that 35% of the sales come from Printers, 25% from Scanners, 30% from Ink Cartridges, and 10% from USB Flash Drives therefore we multiply the total units to the respective sales proportion of each to obtain break even units for each product (Weygandt, Kieso, & Kimmel, 2005) Product Break Even Output Printer 614 Scanner 439 Ink Cartridge 526 USB Flash Drive 175 For the 5th month 2400 (Total Output) is produced Margin of Safety = Actual Sales – Break Even Sales Margin of Safety (5th Month) = 80280 – 58684 = $21,596 3) Month October November December January February Total Revenue 26760 40140 53520 66900 80280 Variable Cost 17640 26460 35280 44100 52920 Fixed Cost 20000 20000 20000 20000 20000 Total Cost 37640 46460 55280 64100 72920 Profit -10880 -6320 -1760 2800 7360 If selling prices increase by 15%, than the new prices will be Prices Product Price Printer $57.5 Scanner $51.75 Ink Cartridge $14.95 USB Flash Drive $9.2 Since we know that it the selling prices increase the demand of the product goes down therefore we have assumed that the demand of the products decrease by 20% since there are a lot of competitors available in the market for the same products therefore the customers will shift to those products. Month Total Output October 640 November 960 December 1280 January 1600 February 1920 Since the business will emerge over the period of time we assume that the total sales unit will grow by 400 units in each month. However, the growth will remain stable in the long term. We assume that 35% of the sales come from Printers, 25% from Scanners, 30% from Ink Cartridges, and 10% from USB Flash Drives Month Output (Printers) Output (Scanners) Output (Ink Cartridges) Output (USB Flash Drives) October 2010 224 160 192 64 November 2010 336 240 288 96 December 2010 448 320 384 128 January 2011 560 400 480 160 February2011 672 480 576 192 The new profit and loss account after increasing the product prices by 15% Month October November December January February Total Revenue 24619.2 36928.8 49238.4 61548 73857.6 Variable Cost 14112 21168 28224 35280 42336 Fixed Cost 20000 20000 20000 20000 20000 Total Cost 34112 41168 48224 55280 62336 Profit -9492.8 -4239.2 1014.4 6268 11521.6 If fixed costs drop by 10% Fixed Costs = 20000 x 0.9 = $18,000 The new profit and loss account if the fixed costs decrease by 10% Month October November December January February Total Revenue 26760 40140 53520 66900 80280 Variable Cost 17640 26460 35280 44100 52920 Fixed Cost 18000 18000 18000 18000 18000 Total Cost 35640 44460 53280 62100 70920 Profit -8880 -4320 240 4800 9360 Yes it makes a lot of difference to the profit figure if either selling price of the products increase of fixed costs decrease. Both of the affects tend to either increase the total revenue or decrease the total costs which causes the profit figure to increase. 4) In making the cash flow forecast we have assumed that 100% of the cash are in sales. Also the suppliers and labor are paid in full. Cash Flow Statement Receipts October November December January February Cash Sales 26760 40140 53520 66900 80280 Equity Investment 25000         Total Receipts 51760 40140 53520 66900 80280 Payments           Labor Costs 6440 9660 12880 16100 19320 Component Costs 9160 13740 18320 22900 27480 Utility Costs 2040 3060 4080 5100 6120 Rent Expense 7000 7000 7000 7000 7000 Administrative Expense 5000 5000 5000 5000 5000 Advertisement Expense 5000 5000 5000 5000 5000 Lease Payment 3000 3000 3000 3000 3000 Total Payments 37640 46460 55280 64100 72920 Net Cash Flow 14120 -6320 -1760 2800 7360 Opening Balance 0 14120 7800 6040 8840 Closing balance 14120 7800 6040 8840 16200 5) We have used a mixture of cost plus and contribution pricing in our products. Products which are somehow expensive (Printers and Scanners) have a higher contribution margin since we believe they are highly differentiated therefore contribution pricing method was the best way to price them. For the low priced products we (Ink Cartridges and Scanners), we have used cost plus pricing tool. Factors affecting the demand of our product: The price of related goods and products The number of consumers in the market Elasticity (Printers) = % change in quantity demanded / % change in Price Elasticity (Printers) = 20% / 15% = 1.33 We have an elastic demand for the printers since it is greater than 1. References Weygandt, J. J., Kieso, D. E. & Kimmel, P. D. (2005), Managerial Accounting: Tools For Business Decision Making, John Wiley & Sons: New York Read More