Revolutionary Footwear Product - Assignment Example

?REVOLUTIONARY FOOTWEAR PRODUCT REVOLUTIONARY FOOTWEAR PRODUCT (Your (Your (Year) Introduction Innovation is the backbone of the footwear market and as such modern designs that are made using the highest levels of creativity have the potential of taking the footwear products to a whole new level therefore giving footwear customers an experience that is second to none. This is the main motivation behind the creation of a new revolutionary footwear product and this report is aimed at presenting the idea behind the new footwear product. This report shall scrutinize the footwear product’s potential to generate profits, its cash flow level in the first 12 months of operation, the forecast cash budget for the first 12 months, the forecast income statement for the first 12 months and the forecast balance sheet as at the end of each of the first 12 months. These statements shall then be used to determine if the project is viable or not. To bring out this details, the report shall develop a marginal costing statement that clearly points out the cost per unit of producing each item of the new footwear product, a break even analysis table and graph that shows the time that the project will take to break even, a cash budget that shows how cash will be utilized across the first 12 months, a forecast income statement that shows how much profits will be made from the project within the first 12 months and a forecast balance sheet that shows the project’s assets and liabilities as at the end of each of the first 12 months of operation. The new footwear product that will be developed is a sports shoe that is made of alligator skin combined with goat skin which is known to be light and comfortable as well as durable enough to fit the potential expected for this project. Alligators are rare species and as such the portion of alligator skin used on each shoe will be minimal. On the other hand, goat skin is readily available therefore the supply of the same is expected to be sufficient (Boer Goats 2011). The footwear product shall be referred to as the ‘sporting’ Financial projections The products revenue forecasts, the profits and the cash flows are based on the following assumptions The goats skin shall be readily available and each alligator skin available shall be utilized to the maximum, Due to the revolutionary nature of the product, the monthly sales are expected to be 50,000 units with a monthly growth rate of 2%. The market for the product is expected to be readily available due to the number of shoe distributors available The footwear product has a high growth potential in the United Kingdom due to its light weight and durability which will make it stand out from the rest of the footwear products available in the United Kingdom and eventually the world at large. The price of the footwear product is expected to be ?40 per unit which is priced based on the quality of the footwear and the competitors as shown by the price of footwear in the UK and the US (All footwear 2011). The production capacity of the production process is expected to run at the optimal point from the beginning of the project (West, Hussey and Bendrey, 2003). Marginal costing cost statement (Evans and Michael 2011). The price of the new footwear product will be equal to ?40 as shown in the marginal costing cost statement above; the total unit variable cost is expected to be ?35 for the first month of operation which shall increase as shown in the cost statement above. These variable costs are comprised of the prime cost which is made up of direct materials, direct labor and direct overheads in the proportions shown in the cost statement above, indirect variable overheads, variable administration costs and variable selling and distribution costs. The variable selling and distribution costs are expected to increase at the rate of 1% per month. The contribution per unit arrived at after the variable cost is as shown in the marginal cost statement (Evans and Michael 2011). Break even pre-analysis The contributions per unit figures shown in the marginal cost statement are used in preparation of the break even pre-analysis table above. The monthly sales are expected to be 50,000 units per month which shall increase at the rate of 2% as shown in the table above. This indicates that the total sales for the first 12 months will be equal to 671,000 units while the total contribution for the same period will be equals to ?3.194 million. The fixed costs on the other hand shall be equal to ?266,000 per month which adds up to ?3.192 million per year and they include fixed administration costs, fixed selling and distribution costs and fixed factory overheads as shown in the table above. The net profit for the first 12 months is expected to be equal to ?2,000 which is expected to increase with time after the break even period (Brigham and Michael 2010). Break even analysis table The total fixed cost for the product in the first 12 months of operation is equal to ?3.192 million as shown in the break even table above, the total variable costs are equal to ?23,630,372 and the total sales is equal to ?26,824,179, the breakeven number of units is equal to 668,832 units and the breakeven revenues are equal to ?26,753,280 indicating that the margin of safety is equal to ?70,900. The margin of safety is arrived at by deducting the break even sales from the total sales for the first 12 months of operation (Wentworth, Wentworth and Michael 2010). Break even chart As shown in the breakeven chart above, the breakeven point is the point where total costs is equal to total revenue and the margin of safety is the total revenues in the first 12 months of operation less the break even sales (Wentworth, Wentworth and Michael, 2010). The break even chart and the breakeven table show that the project will break even after eleven months. The new footwear product’s cash budget According to the cash budget above, the product will require an initial capital of ?500,000 which will be used to purchase fixed assets amounting to ?150,000 and to take care of the fixed costs for the first month of operation amounting to ?266,000. The fixed assets include equipment for manufacturing and distribution of the footwear product (West, Hussey and Bendrey 2003). Forecast income statement The depreciation of the fixed assets is estimated to be at 10% on a straight line method of depreciation. Since the depreciation is a non-cash transaction, it is not used in the break even analysis and the cash flow forecast. The project’s total loss for the first year of operation is equal to ?13,000 as shown in the income forecast above. Forecast balance sheet hs.en table shows that the project will break even after elevenm the margin of safety 00000000000000000000000000000000000000 The balances of assets and liabilities for each of the 12 months are as shown in the forecast balance sheet shown above. The assumption used in the above balance sheet is that closing inventories shall amount to 5% of total sales, an amount of ?50,000 is expected to be accounts payable for each month and the accounts receivable are expected to be the balance between assets and liabilities for each month (Brigham and Michael, 2010). Conclusion As shown in the break even analysis chart and table above, the project will break even after eleven months and the project has a margin of safety of ?70,900 which means that the project’s forecasted sales level can decrease by ?70,900 per year and the project will still break even within the first eleven months. The forecast income statement shows that in the first year of operation the project will incur a loss of ?13,000 which is attributable to the initial capital outlay and the low revenues and high costs associated with the start up period. This analysis therefore indicates that the project is viable. List of references Allfootwear, 2011, ‘Wholesale closeout shoes’, Available from http://www.allfootwear.com/ [Accessed on 15th November 2011] Boer Goats Home, 2011, ‘Why should you Raise Meat goats’, Available from http://www.boergoatshome.com/why_meat_goats.php [Accessed on 15th November 2011] Brigham, E, F & Michael, E, C, 2010, ‘Financial Management Theory and Practice’, Florence: Cengage Learning Evans, N & Michael, J, 2011, ‘Costing for the Fashion Industry’, London: Bloomsbury Wentworth, J, Wentworth, J, Michael, C, 2010, ‘Break Even Analysis’, New York: Business Expert Press West, C, Hussey, R & Bendrey, M, 2003, ‘Essentials of management accounting in business’, Florence: Cengage Learning Read More