Financial Calculations for a new hair care product - Assignment Example

?Table of Contents Task 2 List of Assumptions along with Financial Calculations 2 Task 2 3 Marginal Costing and Contribution 3 Task 3 4 Breakeven point Calculations:- 4 Task 4 5 Financial Documents 5 a)Balance sheet 5 b)Income Statement 7 c)Cash Budget Statement 8 Task 5 10 Sales Pitch Explaining the Financial and Costing Data 10 i.Introduction 10 ii.Financial Analysis 11 a)Output: 11 b)Variable Cost: 11 c)Fixed Cost: 12 d)Gross Profit Margin: 12 e)Return on Sale: 12 f)The Break-Even Analysis: 12 g)Marketing 13 iii.Conclusion: 13 Reference List 14 Accounting and Finance Assignment Brief 2013/14 Semester 1 NEW HAIR CARE PRODUCT Task 1 List of Assumptions along with Financial Calculations Given below is the proposal / break-even analysis of a new product to be introduced to the market. The product is a herbal shampoo prepared from natural herbs to protect, nourish and nurture the scalp and make hair healthy, thick and lustrous Based on the market research and demand analysis, the financial figures associated with the project are given below Fixed Costs A production facility (Greenhouse) will be rented As per property dealers, the premises will cost?3000 (Approx.) and the amount includes electricity, water and gas bills Equipment requirements: Distillation Apparatus with Heating coil and jar Pulverize with 5 HP motor Stirrer with 2 HP motor and S. S. Tank Mixer with motor Weighing Balance & Weights S.S. Containers Furniture and fixture Misc. equipment The equipment will cost ?8,000. Depreciation at a rate of 10% will be charged. A distribution van will be purchased The van will cost ? 22,000 Marketing and Advertising A one off expense of ? 1000 will be made for generating awareness through posters, handbills etc Variable Costs:-. Employees consist of 5 workers who work 8 hours per shift at the rate ? 8 / hour. ? 1600 / week or 320 / day The raw materials required for production ?650 for 250 units or 2.6 / unit Other Direct Costs ? 1.25 per unit Other Financials A bank loan will be obtained at 10 % interest rate. ? 100,000 Price and Sales Price of A: ? 15, it is expected that the sales would be 15000 units per month Sales are expected to increase in the coming years Costs will increase by the inflation factor (as obtained from the IMF projections for USA). Scientific research for the development of new hair care product is exceptionally costly and it can be difficult to manage for smaller companies. And all the products have to pass through research along with the specific product development phases. Keeping in view these facts, the above table shows a list of assumptions made for the development of the hair care product. Moreover, these assumptions would serve as the baseline for calculating the revenue and costing of the product, marginal costing, sales / production basis and the break even analysis (Bernstein and Wild, 2000). Task 2 Marginal Costing and Contribution Based on market research, it is expected that sales will be 10,000 units per month (Wood & Sangster, 2011). Per unit Sales 1,800,000 Less Marginal Cost of Sales Production Cost (Valued @ marginal Cost) ?607,739 Less Closing Stock (Valued @ marginal cost) ?92,310 Marginal Cost of Production ?515,429 Add Advertising expenses ?1000 Marginal Cost of Sales (516,429) Contribution ?1,283,571 Less Fixed Cost ?65,000 Marginal Costing Profit ?1,227,571 Marginal Cost Per Unit Total Output for the year 141,203 Total Variable Cost 607,742 Total Fixed Cost 66000 Per unit marginal cost= total variable cost divided by total output 607,739/141,203 ?4.304/Unit Task 3 Breakeven point Calculations:- The breakeven analysis is utilized to determine the point in duration at which the revenues of the business becomes equivalent to the costs of the business. The following section of the document presents breakeven analysis of the hair care product. The formula used for the breakeven analysis is as follows: Break even Sales = Fixed Cost Price – Variable cost Break even Sales = ?66000 / (? 1800000 - ? 607,739)/141203 Break even Sales = 7817 Units Breakeven level of Revenues = 7818x 15 = ?117270 Task 4 Financial Documents a) Balance sheet Fixed Assets ? ? ?   Historical Cost Depr. NBV Distribution Van 20,000 2500 17500 Equipment 10000 1000 9000 Total fixed assets - - 26500 Current Assets Stock 240,000 - - Cash in bank 242879.7 - - Debtors 50,000 - - Total current assets - - 532879.7 Total Assets - - 559,379.70 Liabilities - - - Bank Loan (5 yrs) - - 80,000 Net assets - - 479,379.70 Financed by Bank Loan 100,000 - - Net profit 379379.7 - - Capital employed - - 479,379.70 b) Income Statement Total Sales 1,800,000   Cost of Goods Sold 846,000   Gross Profit   954,000 Operating Expenses:     Wages 83,429   Raw Materials 312,000   Int. on Loan @ 10 % 10,000   Depreciation of Fixes Assets 6,600   Total Operating Expenses 412,029   Income Before Tax   541,971 Less Income Tax @ 30% 162,591   Net Operating Income   379,379.7 c) Cash Budget Statement   Dec Jan Feb March April May June July August Sept Oct Nov Cash Inflow                         Opening bal. 40,000 82,040 125,080 168,120 211,160 254,200 287,240 330,280 373,320 416,360 459,400 502,440 Cash sales 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 Total Inflow 190,000 232,040 275,080 318,120 361,160 404,200 437,240 480,280 523,320 566,360 609,400 652,440 Cash Outflow                         Raw material 88,103 88,103 88,103 88,103 88,103 88,103 88,103 88,103 88,103 88,103 88,103 88,103 Labor Cost 6,857 6,857 6,857 6,857 6,857 6,857 6,857 6,857 6,857 6,857 6,857 6,857 Advertising 1,000                       Loan Payment           10,000           10,000 Int. on Loan                       10,000 Other Exp 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 Total Outflow 107,960 106,960 106,960 106,960 106,960 116,960 106,960 106,960 106,960 106,960 106,960 126,960 Closing Bal 82,040 125,080 168,120 211,160 254,200 287,240 330,280 373,320 416,360 459,400 502,440 525,480 Task 5 Sales Pitch Explaining the Financial and Costing Data i. Introduction This is a report prepared for the investors to convince them in the establishment of a new firm which intends to go into the production of a new hair care product named Felicity herbal Shampoo. There is a growing market for organic and natural hair care products. As people are becoming more and more looks conscious and appearances are becoming more and more important people are inclined to invest their money in natural products that do not damage the hair. In the long run chemical products weaken the hair and make them more prune to temperature changes and dryness. We have identified this growing market and fully recognize that there is a gap in the demand and supply which creates an opportunity for us to tap the market and earn profits (Hill, 2008).We have come up with a revolutionary hair care product which will change the dynamics of the hair care industry. The product is made of all natural ingredients which include the following (Mckay, 2004). Ingredients Uses Amla It is used to make the hair strong and black Reetha It is used as a cleaning agent Shikakai It provides softness to hair Brahmi It is a cooling agent Leaves of Neem They are used to give volume, thickness and strength to hair Acid Slurry For cleaning C.H.G It acts as a preservative and increases the shelf life of the product Others like Natural color and perfuming agents ii. Financial Analysis a) Output: Expected daily output is 500. There will be six working days in a week; therefore the weekly output will be 3000. The monthly and annual output levels are expected to be 12,000 = (3000 * 4) and 141,203 (Approx) = ((12,000 * 12) - festival holidays) respectively. Out of the monthly output of 12,000, we expect to sell about 10,000 on a monthly basis and 120,000 units annually. The projected unit price of the product is ?15 thus the expected monthly and annual revenue generated through sales comes out to be ?150,000 and ?1,800,000 respectively. b) Variable Cost: The total variable cost is comprised of the Raw Material cost, the Labor cost and other direct costs. The company employees 5 employees at the rate of ? 8/ hour and they work in eight hours shift. Thus the daily and weekly labor costs come out to be 320 / day and ? 1600 / week respectively. Thus the annual labour costs are equal to ? 83,429. The ingredients required for the production is estimated to cost about ? 650, which is enough to produce 250 units 2.6 / unit. The total units sold in a year are equal to 120,000thus annual cost of ingredients comes out to be ? 312,000. An additional direct production cost of ? 1 is incurred on each unit of the product. This is expected to cover the packaging expenses. This brings the total annual variable cost of the products to ? 395429. c) Fixed Cost: Rent of the production site, purchase of a distribution van and the acquisition of the production equipment are the three fixed cost items identified in the anticipated firm. The production site has a monthly rent of ? 2,500 which also includes the bills on electricity water and gas. A distribution van will also be purchased whose estimated cost is ? 20,000 and the other equipment required for production will cost ? 10,000. The expected useful life of the van and machinery are five (5) years each and depreciation rate is 10 %. The total fixed cost of the business is ? 60,000. d) Gross Profit Margin: Gross Profit Margin is a measure of cost of goods sold as a percentage of sales. Gross profit margin is derived by dividing gross profit by sales. GPM = 954,000 / 1,800,000 = 0.53 which basically means that about fifty three percent (53 %) of the sales revenue makes up the gross profit. e) Return on Sale: This ratio is extensively used to evaluate a company's operational efficiency. It measures the proportion of the sales revenue that is converted to profit after other expenses have been paid for. This is also known as net profit margin. This ratio is measured by dividing the net profit by sales. ROS = 379,379.7 / 1,800,000 = 0.21. This means that about 21 per cent of the total sales volume is the profit attributable to the owner of the business. f) The Break-Even Analysis: The Break Even Point is the point at which volume of sales or production enables an enterprise or business to cover related costs and expenses without any profit or loss. In other words it is the point at which total income equals total expenditures. The simplest way to calculate a break-even point is to divide the total fixed cost by contribution per unit. For the purpose of this new firm, the total fixed cost is estimated to be ? 60,000 (30,000 + 20,000 + 10,000). Thus Break even Sales = ?66000 / (? 1800000 - ? 607,739) / 141203 Break even Sales = 7817 Units Breakeven level of Revenues = 7818 x 15 = ?117270 g) Marketing Initially in order to attract customers and to create awareness of the product, the company will have to invest in advertising and marketing. The main tools used for marketing include posters and handbills which will be pasted in order to create a buzz. The marketing cost is estimated at ? 1000. iii. Conclusion: From the analysis presented above it is evident that the business is a worthwhile investment. This decision is supported by the findings from the financial analysis. The income statement, the cash budget, the breakeven point and the sales turnover all indicate that this is a sound investment which has the ability to earn high profits for the investors. The investors should consider the financials and also the growth potential of the market before coming to a decision. The market is favorable and we have a sound idea. The combination of the two can result in high yields for the investors. Reference List Bernstein, L. A. and Wild, J., 2000, Analysis of Financial Statements.  Business & Economics, McGraw-Hill Education Berger, A.,2011, Standard Costing, Variance Analysis and Decision-Making. GRIN Verlag Carey, M., Knowles, C. & Towers, J., 2011, Accounting – a smart approach, Oxford University Press Friedman, A. L. and Miles, S.,2006. Stakeholders: Theory and Practice.  Business & Economics, Oxford University Press Hill, B., 2008, How to Estimate Start Up Capital for Starting a Business. Retrieved from: http://smallbusiness.chron.com/estimate-start-up-capital-starting-business-1859.html Mckay, T., 2004, Ingredients Commonly Found in the Hair Care Products. [online] Available at [Accessed 24 December 2013] Moran, G., 2013, Targeting Growth opportunities in a Mature Market. [online] Available at: < http://www.haircare-ingredients.com/?timezone=Asia/Dubai> [Accessed 24 December 2013] Owen, S. A., 2003. Accounting for Business Studies. Oxford: Elsevier Butterworth-Heinemann. Wood, F.,& Sangster, A., 2011.Frank Wood’s Business Accounting Volume 1, 12thEdition, FT Prentice Hall. Read More