New Energy Drink: Super Health Accounting Assignment - Essay Example

New Energy Drink Super Health Introduction In the UK, Energy Drinks have realized a growing market to 15 billion in (Eleftheriou-Smith,Loulla-Mae. 2012) and has been forecasted to grow up to £ 2.3 billion by 2016 (Fourteen19 2012). The newly discovered formula which will be under the brand name Super Health can be expected to soar to high revenue performance within a year at least in UK. It can thereafter penetrate the European market the following year under the following assumptions: 1. The formula will be patented in the International Market. 2. Cost and price should be lower than the existing Energy Drink brands. 3. There will be more than enough investors willing to become a part of the enterprise that seeks to produce the healthiest Energy Drink softdrinks in the world. Investors should consist of working capital providers as well as equipment for mass production (sterilizer, mixer, ingredient extractors, laboratory microscopes, plastic bottling machine, refrigerators, delivery vans) so that their additional investments in kind or in cash can be as needed at the right time and in the right places. For example, if the manufacturing plant needs expansion, an investor specialized in supplying the equipment of the plant can readily facilitate the expansion. There will be no need for surveys, biddings, research. An investor can simply justify his price to value the investment. Cost of production will be assumed at 50% of the low price of Super Health which is £1.oo. Competitors’ prices were researched over the internet to be as follows in the UK: Prices of Energy Drinks in UK as of 2012 at http://www.mysupermarket.co.uk : Lucozade Black Edition (500 ml) – Cola Energy Drink £ 1.15 Red Bull 250 ml. = £ 1.29 Mountain Dew Energy = £ 1.99 / 1 Liter Sainsbury Blue Bolt Energy Drink = £ 1.39 / 1 Liter ; 59p / 250 ml Red Bull Energy Drink = £ 1.29 / 250 ml Relentless = £ 1.39 / 500 ml Monster = £ 1.39 / 500 ml Main Section . Super Health will have the following competitive features and benefits: Product a. Features (a1) 250 ml. (a2) Plastic Bottle (disposable/recyclable) (a3) White Opaque to reflect light to prevent sunlight from reacting with ingredients (a4) Keep refrigerated (a5) Consume within 8 hours from the time seal is opened. b. Ingredients (b1)B-complex (b2)Ginseng Root Extract (b3)Vit. C (b4) Vit. A (b5)Vit. E (b6)Sodium Bicarbonate (b7)Pure Fruit Nectar (b8)Sterilized Water (b9) Amino Acids from fruits (b10) Selenium from garlic extract (b11) Manganese from garlic extract c. Benefits (c1) Mental Alertness with B-Complex (c2) Relaxed nerves & higher body resistence to illness with Ginseng (c3) Healthier skin and eyes due to Vit. A and E (c4) Helps neutralize acidic stomach with Sodium Bicarbonate (c5) Invigorating (c6) More natural than other Energy Drinks (c7) Enhances immune system if regularly used Competitor products contain the following ingredients: Main Ingredients of UK Energy Drinks Red Bull: Alpine Water Caffeine Taurine Glucuronolactone B-Complex Sucrose and Glucose Relentless Flavored Water Caffeine Taurine Citric Acid B6, B12, Niacin, Pantothenic Acid Sugars Monster Purified Water Caffeine Taurine Ascorbic Acid Glucuronolactone Malic Acid Sodium Benzoate PotassiumSorbate Glycerine B6, B12, Niacin, Folic Acid Sucralose Lucozade Caffeine Citric Acid Sodium Citrate PotassiumSorbate Glycerol Ascorbic Acid B6, B12, Niacin, PantothenicAcid Sugars Aspartime AcesulfameK Mountain Dew ED Carbonated Water Caffeine Guarana Ginseng Citric Acid Potassium Sorbate Sugar Rockstar Carbonated Water Caffeine Inositol Taurine Guarana Ginseng Vitamin C Sodium Gingko Biloba B-Complex Super Health will be sold through at least 1,000 refrigerators in busy places like universities, supermarts, public markets, and so on. It will be primarily to serve as oral rehydration and replenishment of required nutrients for active living. But people will be informed that for best results, users should have at least 8 to 9 hours of sleep each day and at least 3 hours of exercises per week. The new energy drink will have no alcohol content, no coke or coca extract, and no refined sugar. Penetrating the market of UK’s Top Ten Energy drinks listed below will be relatively easier due to some competitive advantages in terms of features and benefits. This will definitely be more beneficial, more natural, and richer in terms of ingredients needed for good health maintenance. It will even boost the immune system as a result of using the product regularly. Figure 1. Energy Drinks Industry Players (Source: Eleftheriou-Smith, Loulla-Mae. High Times for Booming Energy Drinks Sector. Brand Republic, May 10, 2012. Viewed November 27, 2012 @ http://www.brandrepublic.com/analysis/1130592/ ) Investment requirements and details of forecasts, computations, marginal cost analysis, break-even point analysis are in the Excel File attached. Some of the estimates include 1,000 refrigerators for the marketing of the Modern Heathy Energy Drink under the brand name “Super Health”. Each refrigerator should be able to cool Super Health Energy Drink within less than an hour. At a consumption of 100 plastic bottles per hour at an average of 12 hours a day for 365 days, the capacity sales will be 438,000,000. At an introductory price of £ 1.oo per 250 ml, yjr potential sales can be £ 438 million in UK alone within the first year. Cost of 1,000 refrigerators = £ 800 x 1,000 = £ 800,000 Delivery Trucks budget = £ 12,000 x 10 = £ 120,000 Using the annual report 2011 of Monster Energy Drink which has a total asset of less than $ 2 million, the assumption will be that such value may now be much higher as a result of inflation over the years. Thus, the forecasted initial investment to have a capacity sales of £438 million will be 40 times within a span of one to five years. However, the growth should be gradual because the expansion should also be gradual. TV, radio, internet, campus advertising will be very heavy during the first year of promotions. What is important in order to get people to consume Super Health will be the education of people with regards to the importance of substance not found in most, if not all, other energy drinks in the market. These are Vitamins A, E, and Honey. Such ingredients have so much benefits that people have to buy their multivitamins in order to maintain good health with A, E, and honey. Amino acids are also needed by people who work out in gyms in order to convert fats into muscles. When this information becomes popular, it can be logically anticipated that people in UK will not only try Super Health as a regular drink, but also shift all their softdrinks intake to the lower-priced alternative known as Super Health. Competitors will scamper with new ideas to get back their customers. But due to the patent, they will have to find another formula and dump their other energy drinks. Super Health is also expected to grab a substantial share from the non-energy softdrinks industry. Conclusion Based on forecasted sales, researched prices, and costs, assuming the gross margin is 50% at a very competitive price of only £ 1.oo per 250 ml of Super Health, the Returns On Investment will be very attractive starting on the 2nd year of operations. Conservative estimates were utilized by allowing for one year of adjustments. The forecasted ROI will be as follows: 2012 2013 2014 2015 2016 2017 ROI 23.58% 143.1% 201.6% 567% 932.4% The value of this business soar due to annual declaration of dividends and very high ROI. References Butter, Susannah. What Energy Drinks Are Fueling London? London Evening Standard, November 20, 2012. Viewed November 28, 2012 @ http://www.standard.co.uk/lifestyle/london-life/what-energy-drinks-are-fuelling-london-8335037.html Caffersky, Michael; Wentworth, Jon; and Merchant, Kenneth A., Ed. Break-Even Analysis: The Definitive Guide to Cost-Volume-Profit Analysis. USA: Business Expert Press, May 2010. Chepulis, Lynn. Healing Honey: A Natural Remedy for Better health and Wellness. USA: Brown Walker Press, 2008. Colllbert, Don MD. The Seven Pillars of Health: The Natural Way to Better Health for Life. Florida, USA: Charisma Media, 2007. Eleftheriou-Smith, Loulla-Mae. High Times for Booming Energy Drinks Sector. Brand Republic, May 10, 2012. Viewed November 27, 2012 @ http://www.brandrepublic.com/analysis/1130592/ Fourteen19. Gen: Why. Fourteen19 Youth Communications 2011. Viewed November 27, 2012 @ http://www.fourteen19.co.uk/Fourteen19/Genwhy-_Issue_6.html Higdon, Jane and Drake, Victoria. An Evidence-Based Approach to Vitamins and Minerals: Health Benefits and Intake Recommendation, 2nd Edition. Germany: Thieme Verlag, 2011. Klein, Karen E. Breaking Into the Energy Drink Business. Bloomberg Businessweek Small Business, April 27, 2012. Viewed November 28, 2012 @ http://www.businessweek.com/articles/2012-04-27/breaking-into-the-energy-drink-business Marks, Ray. Health Literacy and School-Based Education. UK: Emerald Group Publishing, November 2012. Ojugo, Clement. Practical Food and Beverage Cost Control 2nd Edition. USA & Canada: Delmar Cengage Learning, March 2009. Preedy, Victor R. and Greaves, Ronda. Vitamin A and Carotenoids: Chemistry, analysis, Functions, and Effects. UK: Royal Society of Chemistry Publishing, 2012. Russo, Ethan B.; Hou, Joseph; and Jin, Youyu. The Healing Power of Chinese Herbs and Medicianl Recipes. USA: The Haworth Press, Inc., 2012. Singh, Gary. How to Boost Your Immune System Naturally? USA: Lulu.com 2008. Thomas, Scott Caroline. Trendwatch: What’s new in Energy Drinks? BeverageDaily.com, November 5, 2012. Viewed November 28, 2012 @ http://www.beveragedaily.com/On-your-radar/Energy-Drinks/Trendwatch-What-s-new-in-energy-drinks Webb, Geoffrey P. Dietary Supplements and Functional Foods. USA: John Wiley and Sons Publishing, 2011. Appendix Section A. Marginal Costing Estimates and Break Even Point Notes to Marginal Costing Estimates: Cost of production includes the cost of raw materials, cost of labor, and other production costs like the annual rental of factory building, warehouse, and land. Selling expenses will include advertising, delivery, sales promotions, cost of maintaining trucks, refrigerators. Electricity will be at the expense of retailers who will manage the refrigerators in their locations. Administrative expenses will include non-production office rent, the management and staff salaries, and all other expenses not related to selling. It also includes depreciation of production equipment spread over 20 years given the fact that it is being maintained yearly to be in top shape. More details about the administrative costs are shown as follows: Break Even Point Analysis A2. Graphical Presentation Values in £ TC5=29.5 25,000,000 TC4=8.26M VC/PC5 Total Sales Line 5,000,000 TC3=2.67M VC/PC4 2,000,000 TC2=1.9M NI=1.7M NI=14.48M 1,500,000 VC/PC3 1,000,000 TC1 VC/PC2 500,000 VC/PC1 FC= 222,704 FC=222,704 NI=44K FC=222,704 NI=330K FC=222,704 FC= 222,704 0 1,000,000 2,000,000 3,000,000 10,000,000 50,000,000 Sales in Units -100,00 Net Loss1 Fixed Costs consist of Office Rent, Factory Rent, Equipment Amortizations = 24,000 /year + 35,000 / year + Truck (1,400 x 12) + Refrigerators (10,667 x 12) + Plant (1,575 x 12) = 222,704. BEP = 222,704 / % GM = 222,704 / 50% = 445,408 units B. Cash Flow for 1 Year Notes on Cash Flow: The business will only rent a manufacturing plant and a separate office. Office Rent per year was determined to be about £ 24,000.oo based on £15 per square foot rate of rent in Livingston. Factory rent will be charged to the production cost, particularly production overhead. 10 Trucks worth 120,000 will be purchased on instalment; 30% downpayment + 1,400 per month. 1,000 Refrigerators worth 800 will be purchased on instalment. 20% down payment with balance 5 years to pay at 10,667 per month. Factory equipment will be purchased at 100,000 + the initial cost of renting the factory itself which was surveyed to be at 35,000 per year. Notes to Cash Flow: Trucks will be purchased on instalment with 30% down payment, 5 years to pay, and not new but reconditioned. Surveyed cost was £12,000 per truck. Cost of repairs and maintenance will fall under selling expenses. Annually, the amortization cost will be £ 16,800. Monthly, the amortization cost will be £ 1,400. Although Figure 2 shows a price in Euro, the equivalent is about £9,600 excluding interest. Thus, the £12,000 estimate is possible inclusive of interest due to instalment terms. Figure 2. Surveyed Softdrinks Truck (Source: Trucks Hulleman @ http://www.hulleman.com/?gclid=CKfB7YmBiLQCFagn4godCysAMA ) Refrigerators will be purchased brand new so that they will be under warranty. The surveyed cost was £800 per unit. Because this is a non-moving equipment, 20% down payment will be acceptable, and the balance will be 5 years to pay. Thus, 1,000 units will have an annual amortization of £128,004 while the monthly amortization will be £10,667. Production equipment inclusive of building rent was estimated at £ 135,000. Figure 3 shows a sample source. Equipment + Factory/Warehouse Rental = 100,000 + 35,000 on the first year. Figure 3. Price of Softdrinks Production Line Machine (Source: Alibaba.com @ http://www.alibaba.com/showroom/soft-drink-manufacturing-machinery.html ) Figure 4. The Assumed Location For Rent @ 35,000 / year (Source: HouseBuy.co.uk @ http://www.housebuy.co.uk/Properties/Factories_and_Industrial_in_UK/ad898UK-Factories_and_Industrial_for_rent_in_Livingston_(Scotland).html ) C. Sales Forecast * Forecasted Income Statement Notes on Forecasted Income Statement: Selling Expenses will be 20% only in 2012 and 2013 due to heavy advertising and promotions to introduce the new energy drink by educating the public about its benefits and advantages over other energy drinks. By 2014, selling expense will be drastically reduced to only 10% because there will be no need for further advertising and promotions. D. Balance Sheet as of January 2013 Notes on Balance Sheet: 1.Prepaid Expense is the amount paid for the Office Rent good for a year. The rent for one year pertaining to the Factory / Warehouse space where the production equipment will operate, will be charged to the cost of Factory Equipment on the first year. The cost of such an equipment cannot be incurred without a factory to shelter it during operations. Subsequent cost of rent will be charged to the production overhead. 2.Accounts payable would consist of the monthly amortizations that would have to be paid for the Trucks, Refrigerators, plus the purchases of raw materials on credit. 3. Non-current Liabilities would consist of the portion of amortizations for Trucks and Refrigerators that will be due only after a year up to 5 years. E. Return On Investment ROI 2013 2014 2015 2016 2017 23.58% 143.1% 201.6% 567% 932.4% Read More