Management Accounting - Designers Providing Sketches and Ideas - Essay Example

1. SUMMARY OF THE BUSINESS OPERATION The business operations include designing the card, graphic design and production preparation, producing the printing plates, printing the cards, cutting apart and packaging, and quality control (Greeting card n.d.). 1.1. Designing the Card Designers will be contracted to provide sketches and ideas we feel will be good sellers and fit our niche markets. These contract designers provide the illustrations and verse featured in the product. Once we are pleased with these mock-ups, they will be examined and rated by consumer panels or focus groups. The prototypes deemed most marketable are then moved into technical production (Greeting card n.d.). 1.2. Graphic Design and Production Preparation When the designs are approved for production, graphic artists and technical production assistants are key to translating original artwork and scrawled words into a pleasing, coordinated product that can be mass produced. Thus, graphic designers might re-size artwork to make it fit a card, add color underneath or on top, combine images with appropriate typefaces for the verse inside, etc. The graphic designers must understand the capabilities of the printing machines and use only those numbers of colors that can be successfully and economically printed. Artwork, transparencies, etc. and verse are united in a mock-up that is approved for further development. When approved, all the specifications for the approved card-everything from the illustration on the front to the verse inside to the UPC code and price on the back-are scanned or input onto a computer disk and sent to the printer (Greeting card n.d.). 1.3. Producing the Printing Plates The printing process is controlled digitally. Plates are created directly by exposure to lasers. A computer disk has "recorded" the image to be reproduced. A plate is run through a machine in which a computer is used to direct lasers to burn an image onto the metal plate. Each color requires its own printing plate and the computer disk is programmed so that it outputs plate specifications for each individual color. It is most economical to print no more than four colors on a card; thus, in most cases a disk produces four plates per card. The plates are now ready to print (Greeting card n.d.) 1.4. Printing the Cards It is important to note that before an entire run of cards is processed, a couple of examples are run off and submitted for "proofing." The designers, marketers, graphic artists, press operators, etc. examine the card and check it carefully to ensure the imprint is of acceptable quality. Minor color corrections or ink adjustments occur before the print run can proceed. When the proof receives the sign-off, mass-printing begins (Greeting card n.d.). Greeting cards, often printed in runs of 400,000 or more, are often printed using sheet fed offset printing that permits the printer to print between 4,000-18,000 sheets per hour. When ink and a fountain solution (water with chemical additives) are applied to the laser-burned metal plate in the right proportion, the image to be printed accepts ink but repels the fountain solution. The non-image (white or background area) attracts the fountain solution and repels the ink and is left unprinted. From the plate, the image is applied under pressure to a rubber canvas called a blanket. The image is then transferred onto a sheet of paper. The sheets of paper to be printed, about 20 x 35 in (50.8 x 88.9 cm), are put on the press mechanically. The press grabs a single sheet of paper at a time, generally printing all of the black images and words first, then moving quickly to the next metal plate (which applies a different color of the design) without allowing time for drying the just-applied inks. While on the press, an aqueous coating (that provides shine) is applied to the just-printed card by another plate. The cards then air dry for approximately five to six days (Greeting card n.d.). 1.5. Cutting Apart and Packaging After the sheeted cards are completely dried, they are cut into individual cards from the larger sheet by a die cutter. The sheets are inserted into the die cutter and an apparatus that resembles a cookie cutter cuts them apart in one stroke. The cards are now a long strip that is yet unfolded (Greeting card n.d.). The card is then sent to the folding machine where it is creased and folded automatically. Cards are often packed by hand and assembled with their envelopes in carton quantities of 700 (Greeting card n.d.). 1.6. Quality Control The production process is carefully monitored. There are at least two submissions of proof copies to the product development teams-before the product is put into disk and then at first printing-to ensure the product is designed as was envisioned and can be printed to quality specifications. Pressmen check color, inks, and completed sheets throughout the printing process. The die-cutter is able to watch the process and makes sure the cutting is done correctly so that straight clean cuts are made. Finally, the folding machine operator monitors the quality of the completed card. He or she is able to now see the card completed and ready for sale; this person has the prerogative to pull inferior cards (poorly printed, badly cut or folded) out of the line and jettison it (Greeting card n.d.). 2. NATURE OF PRODUCT SERVICE Greeting cards are pieces of paper or cardboard upon which photos, drawings, and a verse of cheer, greeting, celebration, condolence, etc. have been printed or engraved. Greeting cards are decorated with a variety of images and include messages to appeal to diverse audiences, sentiment, and occasion to be remembered. Greeting cards are easily made at home using pen and paper or software sold by greeting card and other companies. Recently, virtual cards that include images and verse can be sent to someone by way of the Internet and e-mail and may be printed out on paper by the receiver. Despite the electronic availability of these cards, the greeting card industry continues to sell cards in retail store in huge numbers (Greeting card n.d.). 3. TARGET MARKET To discover the most profitable target market, a questionnaire survey was conducted with customers in 5 shopping malls with a total of 30 shoppers. Of these, 57% are female and 43% are male; 17% are below 20 years old, 60% are aged 21 to 50 years old, and 23% are above 50 years old. Other than gender and age, two other questions were asked. They are (1) What is your primary reason for purchasing greeting cards (Please tick only one.) (2) What is the maximum price that you would be willing to pay for a greeting card For question (1), two choices are given. They are (1) Need and (2) Communication of feelings. For question (2), 3 choices are given. They are (1) Below 1 (2) Above 1 but below 4 and (3) 4 and above. The results of the survey indicate that an overwhelming 80% of the respondents purchase greeting cards because of need rather than for communication of feelings. Also, only 20% of the respondents are willing to pay above 4 for an ordinary greeting card. The rest are divided between "Below 1" and "1 to 4". Therefore, the target market would be consumers purchasing greeting cards based on need. We think that the corporate sector is more likely to purchase greeting cards based on needs. Hence, our target market would be the corporate sector. Greeting cards for a variety of corporate functions such as the welcome of new employees, congratulations to an employee for the arrival of a new born member in his or her family, festivity cards (Christmas cards, New Year cards, Thanksgiving cards, etc.) for business partners and employees, and even layoff cards will be produced for this segment of the market. Also, we will target the local market during the first year of the business and will expand abroad if the first-year profits are encouraging. 4. DIFFERENTIATION OF THE BUSINESS FROM THE COMPETITOR Competition is fierce with the big players dominating the market. Hence, other than finding a niche for our target market, we intend to devise a more effective distribution of our products to differentiate ourselves from the competition. Rather than distributing our cards via the typical shopping centers, we will target the retailers in office buildings in the central business district and office supplies retailers. In this way, it would be easier for consumers to notice our products rather than competing for the consumers' attention with an array of cards in the shopping malls. 5. VOLUME AND MIX OF REVENUE AND NATURE OF DEMAND The UK greeting card industry is worth over 1.2 billion annually, according to Mintel. It is the most successful greeting card industry in the world with 800 publishers producing over 2.6 billion greeting cards in 2000 for the greeting card hungry British public. Keynote's market report puts the average number of greeting cards sent at 55 per person per year (Facts and figures 2006). SPER Consultancy estimates that there are some 450 companies and businesses active in the UK Greeting Cards sector but recognises that more narrow definitions of the industry put the figure at closer to 100-200. The difference can largely be explained by the fact that the more narrow definition covers the larger/medium-sized industry participants but ignores the 'micro-sized' businesses. The latter group of businesses is typically one or two person entities often not registered as a company and frequently not even registered for VAT purposes since their annual sales fall below that which requires VAT registration. The UK Greeting Cards industry is highly concentrated. SPER Consultancy estimates that the 30 largest companies accounted for 73 per cent of total sales in 1999 and that 44.5 per cent of the total 450 companies and businesses in the sector (i.e. the largest 200) accounted for an estimated 93.4 per cent of total industry sales. Thus the smallest 200 businesses in the sector are estimated to have accounted for only 6.6 per cent of total industry sales (Gaining competitive advantage in the UK giftware industry: greeting cards n.d.). We therefore estimate our volume in the first year to be around 1.4 million [((93.4% - 73%) X 1.2 billion cards)/(200 - 30)]. We would also price our cards slightly above the average price in the industry at 1.40 (2005 Market figures n.d.). We believe that our price is more demand inelastic as it caters to the corporate sector. 6. START UP COST The start up costs, including the land, building, equipment, and furniture and fittings are approximately 175,000 (Huffman n.d.). 7. FINANCING OF THE BUSINESS The table below details the financing of the business. Table 1 Financing of the Business Amount () Source of Funds Interest 5,000 The Prince's Trust 0 140,000 (80% of Purchase Price) HSBC Bank LIBOR 30,000 Partners' Savings 0 Sources: Business banking price list 2006 If you're ready to run your own business, we're ready to support you n.d. The Princes Trust n.d. 8. ANALYSIS OF COST The three main categories of costs are fixed costs, variable costs, and semi-variable costs. Fixed costs include depreciation, interest, and insurance. These costs are incurred regardless of the level of production. Fixed assets are depreciated over 15 years. Interest is computed using the 1 year LIBOR rate (LIBOR, other interest rate indexes 2006). Interest is payable monthly (Business banking price list 2006). The premium for property insurance varies depending on the deductibles. We decide on a deductible of 2,500 as it is the amount of loss that we can bear. The premium at this level of deductibles is 0.07685 per 50 of value (Purchasing insurance - procurement n.d.). We assume that insurance is payable quarterly in arrears as is the common practice in the industry. The main variable cost is royalty fees to designers. The royalty fees are 10% of selling price (Juliem 2006). They are variable costs because designers are only paid when cards are sold. Semi-variable costs include print per cost and electricity. Up to a certain level, electricity and print per cost are fixed. Beyond a certain level, machines have to be restarted and night shift has to be implemented. According to industry insiders, the cost per run for a printed, varnished, scoured, and folded card should be around 20 pennies (Matt 2006). Electricity for competitors in similar business is 20% of total costs (News 2005/2006). Hence, we assume that electricity is 20% of total costs. The total costs include royalty, cost per run, insurance, interest, depreciation, and electricity. Excluding electricity, the total costs add up to 255,310. Hence, electricity amounts to 63,828. 9. BREAK-EVEN ANALYSIS The basic CPV model is Selling price X Volume - Variable costs per unit X Volume - Fixed costs = Profits. The break even volume is the volume at which profit is equal to zero. The break even revenue is the revenue at which profit is equal to zero. According to industry insiders, the price that greeting card distributors and manufacturers would be able to command from the retailers would be around half the selling or retail price of the card (Matt 2006). The retail price was set at 1.40 per card as discussed earlier. The price that we can command from wholesalers is thus 0.70. The variable costs are royalty fees and cost per print, which adds up to 0.09 [(10% X 0.70) + 0.02] per card. The fixed costs are namely electricity (63,828), insurance (265), interest (7378), and depreciation (11,667). Let x be the number of greeting cards sold in order to break even. Setting profit equal to zero, we solve for the following equation: 0.7 x - 0.09 x - 63,828 - 265 - 7,378 - 11,667 = 0 0.61 x = 83,138 x = 136,292 Therefore, the break even volume is 136,292 cards. The break even selling revenue is 95,404.40 (136,292 X 0.70). 10. BUDGETED PROFIT AND LOSS ACCOUNT FOR THE FIRST YEAR Sales Revenue 980,000 [(1,400,000 X 1.4)/2] Less Cost of Sales Royalty 196,000 [(1,400,000 X 1.4) X 0.1] Cost per run for a printed, varnished, scoured, and folded card 28,000 (1,400,000 X 0.02) Contribution Margin 756,000 Less Operating Costs Electricity 63,828 Insurance 265 [(175,000 - 2,500)/50 X 0.07685] Interest 7378 (5.27% X 140,000) Depreciation of fixed assets 11,667 (175,000/15) Net Profit 672,862 11. MONTHLY CASH BUDGET FOR THE FIRST SIX MONTHS Dec 2006 Jan 2007 Feb 2007 Mar 2007 Apr 2007 May 2007 Cashflows from operating activities Sales revenue 81,666.67 81,666.67 81,666.67 81,666.67 Royalty (16,333.33) (16,333.33) (16,333.33) (16,333.33) Cost per run (2,333.33) (2,333.33) (2,333.33) (2,333.33) (2,333.33) Electricity (5,319) (5,319) (5,319) (5,319) (5,319) Insurance (66.25) (66.25) Cash Inflow/(Outflow) from Operating Activities - (7,652.33) 57,614.76 57,681.01 57,681.01 57,614.76 Cash flows from investing activities (175,000) - - - - - Cash flows from financing activities Loan 145,000 Partners' savings 30,000 Interest (614.83) (614.83) (614.83) (614.83) (614.83) (614.83) Cash Inflow/(Outflow) from Financing Activities 174,385.17 (614.83) (614.83) (614.83) (614.83) (614.83) Cash Inflow/(Outflow) for the Period (614.83) (8,267.16) 56,999.93 57,066.18 57,066.18 56,999.93 Cash at the Beginning of the Month 0 (614.83) (8,881.99) 48,117.94 105,184.12 162,250.30 Cash at the End of the Month (614.83) (8,881.99) 48,117.94 105,184.12 162,250.30 219,250.23 BIBLIOGRAPHY Business banking price list 2006. Retrieved November 7, 2006, from http://www.hsbc.co.uk/1/2/business/finance-borrowing/commercial-property-finance/commercial-mortgage Facts and figure 2006. Retrieved November 6, 2006, from http://www.greetingcardassociation.org.uk/info-resource/market-info/facts-and-figures Gaining competitive advantage in the UK giftware industry: greeting cards n.d. Retrieved November 7, 2006, from http://www.ga-uk.org/db_market_info_summary/market_info_summary_5.doc Greeting card n.d. Retrieved November 6, 2006, from http://www.answers.com/topic/greeting-card Huffman, R n.d., Printing company for sale. Retrieved November 7, 2006, from http://www.acquireo.com/business-for-sale/26210.aspx If you're ready to run your own business, we're ready to support you n.d. Retrieved November 7, 2006, from http://www.princes-trust.org.uk/Main%20Site%20v2/14-30%20and%20need%20help/start%20up%20in%20business.asp Juliem 2006, New website - greeting cards wanted. Retrieved November 7, 2006, from http://www.ifreelance.com/project/detail.aspxprojectid=7004 LIBOR, other interest rate indexes 2006. Retrieved November 8, 2006, from http://www.bankrate.com/brm/ratewatch/other-indices.asp 2005 Market figures n.d. Retrieved November 6, 2006, from http://www.greetingcardassociation.org.uk/info-resource/market-info/facts-and-figures Matt 2006, Selling greeting cards. Retrieved November 8, 2006, from http://www.businesseye.org.uk/505973.htmlpage=7 News 2005/2006. Retrieved November 8, 2006, from http://www.heidelberg.com/wwwbinaries/bin/files/dotcom/en/about_us/sustainability_report_2006/sustain06_ecology_en.pdf Payette, G n.d., Starting a greeting card business. Retrieved November 7, 2006, from http://www.howtostartup.com/greetingcardpublisher.htm Purchasing insurance - procurement n.d. Retrieved November 8, 2006, from http://www.iastate.edu/orm/second-level/Insurance.html The Princes Trust n.d. 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