Cost-Benefit Analysis of Car Models - Essay Example

Management Accounting November 25, Introduction. Product costs include both variable and period costs. The research delves on the profitability of marketing two car models. The research delves on cost benefit analysis. Enhanced decision making includes proper costing and pricing strategies. Section A: Chosen business and products. The chosen business is “buy and sell” business. Another term for the business is trading or merchandising business. The business type is sole proprietorship. The business owner sells two products. The two products are the Skoda car and the Renault car. For the Skoda car, each car cost is £18,000. The cost of each Renault car is £ 12,000 (Crosson, 2011). The company’s expenses will include fixed expenses and variable expenses (Noreen, 2008). On the other hand, the company pays for variable expenses. The variable expenses fluctuate or change in the same direction as the car revenues (DuBrin, 2009). Comparison with Competitor’s Price. The above Table 1 information shows sales prices are pegged on the Skoda car competitor’s selling prices. The above table indicates that the company’s Skoda selling price is lower than the competitor’s car selling price in order to increase customer demand for the Skoda (Hartline, 2011). In the same manner, the company is selling its Renault car at a selling price that is lower than the competitor’s selling price. The lower price is a marketing strategy to increase revenues (Buttle, 2009). Since the prices are lower, the company expects to generate high Skoda and Renault car revenues (UKCardiscount, 2012). In addition, the above table 2 data indicates the sales prices of the company’s Renault car in relation to the competitor’s selling price (Chandler, 2011). The above table indicates that the current and future customers can save more money if they purchase the company’s lower priced Renault car, when compared to purchasing the competitor’s car (UKCardiscount, 2012). Further, the table 3 data clearly shows the company’s fixed expenses (Glencoe, 2011). The fixed expenses include the flat rent, electricity, water, telephone, garbage, and other expenses (Levine, 2008). The increase in the car sales normally does not significantly influence the fixed expenses. The fixed expenses are period expenses (City-data, 2012). Furthermore, the table 4 statistical data clearly shows the company’s variable expenses. When the sales increase, the variable expenses also increase (Miltenburg, 2005). In the same manner, when the sales decline from one accounting period to another, there is a corresponding decline in the company’s variable expenses (Pride, 2012) Section B: Target Selling Prices. As shown in table 1 and table 2, the products are Skoda car and Renault car. The selling price of each Skoda car is £ 22,500. The Renault car sells at £ 15,500 each. The business offers the current and future customers two car choices. For the more affluent prospective car buyers, they can choose the higher quality car, Skoda (Energuide, 2012). For the budget conscious and low income prospective clients, they can buy the lower priced Renault car. (Gupta, 2011). The prices of the two cars are lower than the selling price of the competitors. Further, the selling price of both the Skoda car and the Renault was based on marketing research. Marketing research includes determining the prices of the competitors. The company’s chosen marketing procedure is realistic. Normally, the current and future customers compare the prices of several competitors’ products and services. With all other factors on equal status, most current and future customers prefer to buy the produce with the lowest possible price (Tungate, 2008). However, when the quality of one product is better than the quality of a competing product, several current and future customers prefer to purchase the higher prices car because higher prices indicate that the product is of better quality, when compared to a cheaper priced competitor’s product (Yeoman, 2006). Also, the table 5 data shows the unit cost computation for the two company car alternatives. The Skoda unit cost is £ 22,429.38 per car. The unit cost for the Renault car is £ 14,952.92. The car unit cost includes the production costs. The costs also include a portion of the company’s total fixed costs. The total unit cost incorporates the variable expenses. Breakeven sales: Skoda Car. Using the formula => Sales - variable cost - fixed cost = profit: 22,500x - 19,237.50x - 12,767.50 = 0 X = 12,767.60 / 3,262.50 X = 3.9 or 4.0 (rounded off) Skoda cars The above computation clearly shows that company must sell 4 Skoda cars in order to breakeven. The breakeven sales occurrence crops up when the company’s revenues contribute to zero profits. Profits are generated by deducting the company’s cost of sales, variable expenses, and fixed expenses from the company’s car revenues (Warren, 2009). B: Renault Cars: Using the formula => Sales - variable cost - fixed cost = profit: 15,000x - 12,825x - 12,767.50 = 0 X = 12,767.60 / 2,175.00 X = 5.87 or 6.0 (rounded off) Renault cars Similarly, the company must sell six Renault cars in order to reach the breakeven sales level. The company’s selling more than six Renault cars will translate to generating net profits. On the other hand, the company’s selling below six Renault cars will indicate that the company is generating a net loss financial picture Warren, 2009) Five Year Budget income statement (Marginal Costing Principles) The table 6 result clearly shows that the company will generate increasing Skoda car revenues during the next five annual accounting periods. The above table clearly shows that the company’s contribution margin increases from one year to the next. With borrowed funds, the company will generate an increasing variable expense within the same accounting period Humphrey, 2007). The table shows that the car company can easily generate net profits for the next five years. As the current and future customers clients trust the company, more and more current and future customers will buy the two car models (Luther, 2011). Similarly, the table 7 data vividly indicates that the company will generate increasing Renault car sales during the coming five years. Consequently, the company will generate an increasing variable expense within the same accounting period. With the increasing annual sales, the company’s fixed expenses do not be influentially affected or changed. In crystal clear manner, the business entity can easily generate net profits during the next five annual accounting periods (Luther, 2011). Five Year Net Present Value Appraisal of New Business. The table 8 data shows how the net present value is arrived at. Based on the company’s five year net income cash inflow, the company will be able to generate a favorable Renault Car net present value. The company’s present value during the next five years of car sales business amounts to £ 1,044,466.08. The company’s total five year net income is £ 2,365,950.00. In addition the company’s investment, amounting to £ 200,000 can easily be recovered. Deducting the £ 200,000 Renault car investment from the present value amount generates a positive net present value amounting to £ 844,126.48. The above table proves that the company’s £200,000 can be easily recorded, despite the 10 percent bank loan interest. The lower priced Renault car will surely contribute to the high demand for the Skoda car products. The table 9 information illustrates the effectiveness of the net present value tool in enhancing the decision makers’ analysis. The above table 8 clarifies that the company’s forecasted Skoda car net income or cash inflows for the next five years. Based on the company’s five year net income cash inflow, the company will be able to generate a favorable net present value. The company’s present value during the next five years of car sales business amounts to a lower £ 1,248,539.13.the next five years of car sales business amounts to a lower £ 1,248,539.13. The company’s total five year net income is £ 1,739,550.00. Deducting the £ 200,000 Skoda car investment from the present value amount generates a positive net present value amounting to £ 1,048,539.13. Suitable Recommendations. The above discussion generates the corresponding recommendations. First, the company must generate the required favorable net present values. The company should sell the Renault and Skoda cars at the above stated price. The low price will persuade the current and future customers to buy the company’s lower priced Renault cars and Skoda cars. The company will be able to capture the competitor’s target market. Second, the company should pay commissions, and other variable expenses. The commission expense is paid to anyone who sells the company’s cars. The people will eagerly advertise the Skoda cars and the Renault cars. The commission is only a meager 5 % of the total revenues. Third, the company’s entertaining the current and future customers will increase customer demand (revenues). The company should invite the prospective client to a restaurant business meeting. The company will explain the many benefits of purchasing the company’s two car alternatives (Pride, 2012). Summarizing the above discussion, product costs should incorporate both variable and fixed costs. Marketing entails selling products, including the Skoda and Renault cars at a profit. Variable costs fluctuate, unlike the fixed period costs. Evidently, better decision making emanates from scrutinizing the costs, sales, and net profit aspect of marketing’s pricing strategy. Section C: Environmental Sustainability. My business should undertake selling cars that comply with environmental laws. The cars’ exhaust pipes should produce clean air particles. The cars should not violate any clean air act provisions. Cars that produce thick black carbon monoxide smoke are banned from the company’s list of available car models. Cars that produce thick smoke contribute to the air pollution. Consequently, the cars add to the health problems of the global warming culprits. The culprits include the greenhouse gases. Overall learning Experience Reflection. I have learned many important topics that will enhance my business decision making acts. The costs should be included in the decision making activities. The Net Present Value tool shows the profitability of borrowing long term funds. The assignment enhances my pricing strategies. A reasonably priced product will increase customer demand. Without a viable marketing strategy, the company’s sales and profit benchmarks may not be achieved. The assignment also hones my expertise in incorporating basic economic principles of supply and demand with the marketing and accounting knowledge. References: BUCKLE, M., 2004. The United Kingdom Financial System: Theory and Practice. Manchester University Press, London. Buttle, F., 2009. Customer Relations Management. Elsevier Press, New York. Chandler, R., 2011. Statistical Methods for Trend Detection. J. Wiley & Sons Press, New York. Crosson, S., 2011. Managerial Accounting. SouthWestern Press, New York. DuBrin, A., 2009. Essentials of Management. SouthWestern Press, New York. City data, City Data. Retrieved November 24, 2012 from Glencoe, O., 2011. First Course Accounting. McGrawHill Press, New York. Gupta, N., 2011. Globalization Does Not Lead to Change in Consumer Behavior. Cengage Learning Press, New York. Hartline, M., 2011. Marketing Strategy. New York: SouthWestern Press. Humphrey, C., 2007. The Real Life Guide to Accounting Research. Elsevier Press, New York. Levine, S., 2008. The Financial Analysts Handbook. Irwin Press, New York. Luther, W., 2011. The Marketing Plan: How to Prepare and Implement Them. Amacom Press, New York. Miltenburg, M., 2005. Manufacturing Strategy: How to Formulate and Implement a Winninng Plan. Productivity Press, New York. Noreen, E., 2008. Managerial Accounting for Managers. McGrawHill Press, New York. Pride, W., 2012. Foundations of Marketing. Cengage Learning Press, New York. Tungate, M., 2008. Branded Male: Marketing to Men. University Press, New York. United Kingdom Car Discount, UK Car Discounts. Retrieved November 24, 2012, from Warren, C., 2009. Managerial Accounting. SouthWestern Press, New York. Yeoman, I., 2006. Luxury Markets and Premium Pricing. Journal of Revenue and Pricing Management , 4 (4), 319-328. Appendix: Table 1 Comparative Skoda Selling Price                   Skoda Competitor     Selling Price £ 22,500.00 £ 22,650.00     Cost 18,000.00         Gross Profit £ 4,500.00                   Table 2 Renault:                   Renault Competitor     Selling Price £ 15,000.00 £ 15,500.00     Cost 12,000.00       Gross Profit £ 3,000.00                   Table 3 Fixed Monthly Expenses:                   Skoda Renault       Rent £ 12,500.00 £ 12,500.00     Electricity 62.50 62.50     Water 20.00 20.00     Telephone 80.00 80.00     Garbage 25.00 25.00     Others 80.00 80.00     TOTAL £ 12,767.50 £ 12,767.50                   Table 4 Variable Monthly Expenses:                 Skoda Renault   Variable Monthly Expenses     Commission 5% £ 1,125.00 £ 750.00   Entertainment 0.5% 112.50 75.00   Other variable expenses 4% 900.00 600.00   Total variable expense £ 1,237.50 £ 825.00   Total fixed & Variable Expenses 14,005.00 13,592.50               Table 5 Car Per Unit Cost                           Total Skoda   Total Renault     Break even Car Units   4   6     Sales   £   £     Variable Cost:   £ 1,237.50   £ 825.00     Cost of Sales   18,000.00   12,000.00     Fixed Cost   £ 12,767.50 3,191.88   £ 12,767.50 2,127.92     Total Unit Cost   £ 22,429.38   £ 14,952.92                         Table 6 Five Year Budget Income Statement Using Marginal Cost Principles (Skoda Car) Skoda Cars                 Year 1 Year 2 Year 3 Year 4 Year 5 Car Units Sold   8 10 13 15 18 Sales £ 2,160,000.00 2,700,000.00 3,510,000.00 4,050,000.00 4,860,000.00 Variable Expenses   1,846,800.00 2,308,500.00 3,001,050.00 3,462,750.00 4,155,300.00 Contribution Margin £ 313,200.00 391,500.00 508,950.00 587,250.00 704,700.00 Fixed Expenses   153,210.00 153,210.00 153,210.00 153,210.00 153,210.00 Net Profit £ 159,990.00 238,290.00 355,740.00 434,040.00 551,490.00 Table 7 Five Year Budget Income Statement Using Marginal Cost Principles (Renault Car) Renault                 Year 1 Year 2 Year 3 Year 4 Year 5 Car Units Sold   10 14 18 20 25 Sales £ 1,800,000.00 2,520,000.00 3,240,000.00 3,600,000.00 4,500,000.00 Variable Expenses   1,440,000.00 2,016,000.00 2,592,000.00 2,880,000.00 3,600,000.00 Contribution Margin £ 360,000.00 504,000.00 648,000.00 720,000.00 900,000.00 Fixed Expenses   153,210.00 153,210.00 153,210.00 153,210.00 153,210.00 Net Profit £ 206,790.00 350,790.00 494,790.00 566,790.00 746,790.00 Table 8 Renault Car:                 Total     Investment 5 years     Net Income £ 2,365,950.00     Present Value Cash inflows £ 1,044,466.08     Investment - 200,000.00     Net Present Value £ 844,126.48                 Table 9 Skoda Car:               Total     Investment 5 years     Net Income £ 1,739,550.00     Present Value Cash inflows £ 1,248,539.13     Investment - 200,000.00     Net Present Value £ 1,048,539.13               Read More