Marginal Cost and Business Strategy - Essay Example

Marginal cost Introduction This paper seeks to explain to potential investors, the financial aspect of a business venture by use of; business forecasts methodology. When coming up with a business strategy, to present to potential investors, assumptions are listed that will be used in making financial data. The documents that I have used in this paper in to explain to potential investors about the business strategy are; cash budget, forecast income statement and a forecast balance sheet. These documents are the ones that I will use, to give a representation of how the business will run in the future, and how income will be of benefit, to the business. Assumptions used The balance sheet that I came up with contains details of the first year after venturing into the business. In the balance sheet, they are details, of the anticipated business assets; both current and fixed, the cash flow in and out of the business, equity the liabilities of the investment for the long-term. This was basically to provide an overview of the cash that was going to be needed for the overall startup and running of the business. The balance sheet more over includes the indications of the deductions of the anticipated cash, expenditure that are collected in the production of the product. A profit and loss statement is thus important in this regard as it is deducted from the income statement accrued from the product minus the costs of the business from the earnings over the given batch of the product over a specific time frame usually on a quarterly, semi-annually or yearly basis. A break even analysis is also used to demonstrate, the benefits of doing business at the point where the cost of doing business is fully covered by the sales of the energy drink that is manufactured. A forecast of the personal expenses and Marginal costing will also be a computation of the direct labor, direct material, direct expenses and the variable of the overheads. Marginal cost statement Marginal costing is an accounting system that is bests for everybody to understand the variables of the business and in the energy drinks, this marginal cost statement for the energy drink, per 100 units of sales. The marginal cost can therefore be expressed as, the accounting in which the variable costs units are charged to the cost units and the fixed costs of the period and usually written off against the aggregate of the contribution. This, enables the prediction of the cost behavior and is very key in the decision making process. The contribution value for the business proposal is computed by the difference between the marginal costs and the sales from the energy drinks. Marginal Cost=Variable Cost= Direct Labor+ Direct Material+ Direct Expenses +Variable Overhead Contribution=Sales-Marginal Cost Graphs and charts will be used in the illustration of the data being used in this business proposal presentation. To express the various data that is key in these discussions. Marginal costing is an accounting system that is, best for everybody to understand the variables of the business and in the fruit juice, this sis the marginal cost statement for the energy drinks, 100 units of sales. Marginal Cost statement Production =100 Units, sales =8,700 Particulars Variable Cost Fixed Cost Direct materials 2500 Direct wages 1800 Direct Chargeable Expenses 400 Prime costs 4700 Factory overheads 7% variable 770 330 factory cost 5470 330 Administration, selling and distribution on costs(80% variable) 928 232 Total cost 6398 652 Contributions( S-V) 2302 Less Fixed Cost 562 Profit £1740 The total marginal cost of a volume of the output can therefore be calculated as follows. Volume of output x marginal cost per unit, This illustrates that the unit cost decreases as the volume of production increase within the existing scale of production. This can be illustrated in the following data below. Particulars Volume of production 100 Units 125 units 150 Units Materials 2,500 3,125 3,750 Labor 1,800 2,250 2,700 Direct charges 400 500 600 Variable Factory overheads 770 962.5 1,155 Variable Administration, selling and distribution expenses 928 1,,160 1,392 Total variable Costs 6,398 7,997.50 9,597 Variable cost per unit 63.98 63.98 63.98 Fixed Cost 562 562 562 Fixed Cost per unit 5.62 4.5 3.75 Total cost (V+F) 6,960 8559.5 10,159 Cost per unit 69.6 68.48 67.73 The above, cost data indicates that the variable cost per unit remains constant whether the business will produce 100 units, 125 or 150 units of energy drinks. It is however, very clear that the cost per unit of production goes down per every increase in the production as illustrated by the chart table above. What as well also stands out is that the cost per unit is also decreasing with the increase of production for the energy drinks. This is due, to the existence of the fixed cost that is spread over an increasing volume of the output for the energy drink by the business. The break even analysis This is the technique, employed in the production departments and management accountants and are used to determine the feasibility of production cost between those that are variable and that change with the production output and with those that are fixed and they do not have any association with the volume of production. Both the fixed and the variable costs are compared with the sales revenue so as to determine the sales volume, value or the production at which the business makes neither a loss nor a profit. This is the breakeven point for a business. This can as well be represented on the break even chart to indicate the costs at the various levels for the business. Break even chart Breakeven point calculation Breakeven point = Fixed cost / (selling price- variable costs 5.62/(73.98-63.98 562/10 Breakeven point = 56.2 (Approximately 56 units every 100 units produced). If the company broke even The statement for every 100 units per month would look like this . Forecast Income Statement Sales Gross sales 73.98 per unit times 57 4,216.86 Less cost of goods sold 63.98 per unit times 57 3,646.86 Net sales 570 Expenses Total expenses 562 Net profit 8 (Approximately zero (for 100 units of products). Cash Budget For the year ended December 2012 Detail Jan Feb. March April may June July Aug Sep Oct Nov Dec Cash bal start of the month 15,000 15,000 15,000 19,000 18,000 19,000 19,000 15,000 20,000 21,000 24,000 25,000 Add receipts Collections from customers 50,000 53,000 57,000 56,000 59,000 59,000 63,000 72,000 89,000 90,000 92,000 92,000 Total cash available 65,000 68,000 72,000 75,000 77,000 78,000 82,000 87,000 104,000 111,000 116,000 117,000 Less expenses direct materials 6,000 6500 7800 8000 12000 8,000 9,000 12,000 15,000 14,000 10,000 12,000 Direct labor 10,000 12,000 11,000 12,500 14,000 15,000 14,000 15,500 14,800 17,000 15,000 14,000 manufacturing overheads 12,000 10,000 12,000 13,500 13,600 14,000 15,000 15,500 16,000 16,000 17,200 17,000 Selling and Admin 12,000 13,000 12,000 13,000 13,400 10,000 13,000 12,000 14,000 12,800 14,300 12,000 Equipments Purchases 14,000 22,000 12,000 dividends 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 Total Disbursements 42,000 43,500 44,800 62,000 55,000 52,000 53,000 78,000 61,800 61,800 58,500 69,000 Excess/deficiency of cash available over disbursement 23,000 24,500 27,200 13,000 22,000 26,000 29,000 9,000 42,200 49,200 57,500 48,000 Financing Borrowing at start 50,000 50,000 80,000 85000 payment at start 50,000 50,000 40,000 40,000 50,000 35,000 Interest 3,750 3750 3,000 3,000 3750 2625 Total financing 50,000 50000 53,750 53750 80,000 43,000 43,000 85,000 53750 37,625 Cash balance at the end of the month 27,000 25500 26,550 40750 58,000 17,000 14,000 76,000 11,750 11,575 57,500 The company requires a cash budget of about of about £11,750. Borrowing that should be done should be done in a way as to cover deficiencies. This is what is represented as the excess deficit deficiency cash that is available for the disbursement in the respective months as indicated on the cash statement. The interests are paid only for the principle money that was borrowed as a loan in the respective months that it had been borrowed. The management as well agreed and approved a dividend of £2000 on a monthly basis. The energy drinks company is one very lucrative business empire we are creating and with the funding available. We would see the business group up and double the profit as shown in the cash flow budget and the forecast statement of the year. The loan payment will be done accordingly within the shortest time possible and within the capability of the business depending on the cash flow. This will include the interest accrued over the duration and this is what we stand by to enable the continuity of our products in the market. There shall be no money borrowing in the month of November and December over the duration as at this time, the business will rely entirely on, its income generated over the duration and it will only be required in the month of January, as the new year starts so as to budget for the maintenance of the equipments and purchasing of the new equipments, to boost the business ability to produce more goods to meet the consumers demand in the market. Bibliography Ahire, S. (2007). Management Science- Total Quality Management interfaces: An integrative framework. US: Sws Prints.478 Eliyahu, M (2002). Accounting Education Change Commission. london: Reuters RIA Group. Thomas, C (2005). Throughput Accounting. New York: Gabler GmbH.26 Eric, N (2008). Theory of Constraints and its Implications for Management Accounting. Germany: Macmilian .525 Eliyahu, Goldratt (2004). Critical Chain. London: Dunod.4554. Eli, Schragenheim (2002). Manufacturing at Warp Speed. London: Reuters RIA Group. 78. 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