Application of financial and break-even analysis to a scenario

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Financial Plan and Break-Even Analysis

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Course Name and Number

Professor

Date of Submission

Break-Even Analysis

Break Down Computation for 6 Months Ended June 2013

In Dollars

Units

Per Unit

In Percentage

Sales (invoiced)

$562,500.00

8500

$66.18*

100%

Variable Cost

$84,170.00

8500

$9.90

14.96%

Contribution Margin

$478,330.00

8500

$56.28

85.04%

Fixed Cost

$35,363.00

Net Income

$442,967.00

In computation of the Break-Even Point, there are two outcomes that require analysis. These are the Break-Even Sales in Units or Volume and Break-Even Sales in Dollars. In Figure 1, the amounts listed are derived from Profit and Loss Forecast section of the excel file. All amounts are forecasts from January to June of 2013 including estimated set-up costs.

Figure 1. Break Down Computation for 6 Months Ended June

*Sales Price per Unit= Original Price x (100% + Mark-Up Percentage)

= $ 57.55 x 1.15

= $ 66.18

Fixed Costs

Salaries and wages

$18,000.00

Repairs and maintenance

$240.00

Advertising

$1,200.00

Marketing survey

$300.00

Rent

$1,800.00

Design and testing

$400.00

Equipment hire/lease

$5,000.00

Patents

$150.00

Depreciation

$100.00

Copyright registration

$120.00

Electricity and gas

$1,000.00

Recruitment and selection

$200.00

Insurance

$1,200.00

Water bills

$200.00

Legal fees

$300.00

Construction

$3,000.00

Transport/courier costs

$540.00

Office set up

$1,000.00

Postage, telephone and fax

$190.00

Distribution

$264.00

Stationery

$159.00

Total Fixed Cost

$35,363.00

Figure 2. Composition of Total Fixed Costs

The company incurred total fixed costs of $35,363.00 for its iScent Alarm Clocks from January to June of 2013. Variable cost is $9.9 per unit which is 14.96% of the sales price per unit. The iScent Alarm Clock has an original price of $ 57.55. Given the proposed mark-up price of 15%, the new price of iScent Alarm Clock is $ 66.18 per unit. Hence, the company will sell an iScent Alarm Clock for $ 57.55 for retailers and wholesalers while $ 66.18 for every single purchase of customers. Moreover, the mark-up percentage of 15% can cover unanticipated or unforeseen product-related costs that may arise in future. Using data provided in Figure 1, below is the computation of break-even point in units and in dollars.

Break-Even Point in Units =

Total Fixed Cost

Sales Price per Unit - Variable Cost Per Unit

Break-Even Point in Units =

$35,363.00

$ 66.18 - $ 9.9

Break-Even Point in Units =

628.34 units

Break-Even Point in Dollars =

$ 41,583.57

($628.34 units x $ 66.18)

Figure 3. Break-Even Point Computation

In Figure 3, the break-even points are 628.34 units and $41,583.57. It means that the company must sell 628.34 units of iScent Alarm Clock within six months to recover the cost of producing those alarm clocks or to simply break-even. To further explain; if the company produced and sold 628.34 pieces of iScent Alarm Clock, each of these units will cover the marginal or variable costs of $84,170.00 as well as all associated fixed costs of $35,363.00. If the company sells 628.34 iScent Alarm Clocks, then it will not experience a loss. Upon selling more than 628.34 units, all fixed costs have been settled, and each unit contributes to earnings by the contribution margin. Hence, if the company sells more than 628.34 units, it will be considered as income for the company. The Break-Even Point in Dollars of $ 41,583.57 is simply the price of 628.34 units when sold.

Units

Sales Revenue

Variable Cost

Contribution Margin

Fixed Cost

Total Cost

Net Income

100

6618

990

5628

35,363.00

36,353.00

-29,735.00

200

13236

1980

11256

35,363.00

37,343.00

-24,107.00

300

19854

2970

16884

35,363.00

38,333.00

-18,479.00

400

26472

3960

22512

35,363.00

39,323.00

-12,851.00

500

33090

4950

28140

35,363.00

40,313.00

-7,223.00

600

39708

5940

33768

35,363.00

41,303.00

-1,595.00

628.34

41583.541

6220.566

35363

35,363.00

41,583.57

0.0

700

46326

6930

39396

35,363.00

42,293.00

4,033.00

800

52944

7920

45024

35,363.00

43,283.00

9,661.00

900

59562

8910

50652

35,363.00

44,273.00

15,289.00

1000

66180

9900

56280

35,363.00

45,263.00

20,917.00

Figure 4. Tabulation of Sales Revenue, Variable Cost, Contribution Margin, Fixed Cost, Total Cost and Net Income

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Figure 5. Chart Summary of Break-Even Points

Figure 4 illustrates the amounts of Sales Revenue, Variable Cost, Contribution Margin, Fixed Cost, Total Cost and Net Income upon selling units of iScent Alarm Clocks in different levels. In analysis of the table, the company incurs a negative amount or losses when it sells less than the break-even units of 628.34. As shown in Figure 4, the company will incur a loss of $1,595.00 when it sells 600 units only. On the other hand, anything sold beyond 628.34 units is automatically a profit for the company. In analysis of the break-even amounts, Sales Revenue and Total Cost tallies to $41,583.60 and Contribution Margin and Fixed Cost tallies to $35,363. Lastly, there is no income and loss on the break-even units of 628.34. Figure 5 shows the graphical interpretation of the intercepting points of Sales Revenue, Total Cost and Net Income in relation to units sold.

Forecasting Techniques

The company has used three forecasting techniques namely; Profit and Loss Forecast (Figure 6), Cash Flow Projection (Figure 7) and Balance Sheet Forecast.

Profit and Loss Forecast

JANUARY

FEBRUARY

MARCH

APRIL

MAY

JUNE

TOTALS

Sales

Sales (invoiced)

$69,000.00

$76,000.00

$85,000.00

$99,300.00

$108,200.00

$125,000.00

$562,500.00

Cost of goods sold

$10,300.00

$12,100.00

$14,470.00

$15,800.00

$15,500.00

$16,000.00

$84,170.00

Gross profit

$58,700.00

$63,900.00

$70,530.00

$90,900.00

$92,700.00

$109,000.00

$478,330.00

Expenses

Salaries and wages

$1,800.00

$2,200.00

$2,500.00

$3,500.00

$3,900.00

$4,100.00

$18,000.00

Advertising

$200.00

$200.00

$200.00

$200.00

$200.00

$200.00

$1,200.00

Rent

$300.00

$300.00

$300.00

$300.00

$300.00

$300.00

$1,800.00

Equipment hire/lease

$5,000.00

$5,000.00

Depreciation

$0.00

$20.00

$20.00

$20.00

$20.00

$20.00

$100.00

Electricity and gas

$200.00

$120.00

$150.00

$230.00

$130.00

$170.00

$1,000.00

Insurance

$200.00

$200.00

$200.00

$200.00

$200.00

$200.00

$1,200.00

Legal fees

$50.00

$50.00

$50.00

$50.00

$50.00

$50.00

$300.00

Transport/courier costs

$120.00

$90.00

$68.00

$85.00

$95.00

$82.00

$540.00

Postage, telephone and fax

$30.00

$31.00

$23.00

$28.00

$48.00

$30.00

$190.00

Stationery

$20.00

$23.00

$24.00

$30.00

$31.00

$31.00

$159.00

Repairs and maintenance

$40.00

$34.00

$27.00

$61.00

$20.00

$58.00

$240.00

Marketing survey

$300.00

$300.00

Design and testing

$400.00

$400.00

Patents

$150.00

$150.00

Copyright registration

$120.00

$120.00

Recruitment and selection

$200.00

$200.00

Water bills

$44.00

$28.00

$21.00

$34.00

$43.00

$30.00

$200.00

Construction

$3,000.00

$3,000.00

Office set up

$1,000.00

$1,000.00

Distribution

$50.00

$30.00

$49.00

$61.00

$40.00

$34.00

$264.00

Total

$13,224.00

$3,326.00

$3,632.00

$4,799.00

$5,077.00

$5,305.00

$35,363.00

Result

Net profit

$45,476.00

$60,574.00

$66,898.00

$86,101.00

$87,623.00

$103,695.00

$442,967.00

Gross profit margin

85%

84%

83%

92%

86%

87%

85%

Net profit margin

66%

80%

79%

87%

81%

83%

79%

Figure 6. Profit and Loss Forecast

Cash Flow Projection for iScent

January

February

March

April

May

June

Totals

Cash Balance - Beginning

$50,000

$64,521

$78,585

$102,676

$127,915

$133,955

Cash Inflow

Operating revenue

Cash receipts from customers

$25,000

$26,300

$24,800

$26,540

$21,050

$24,760

$148,450

Collection of receivables

$2,745

$3,102

$3,258

$3,498

$3,795

$4,046

$20,444

Other operating revenue received

$0

$0

$0

$0

$0

$0

$0

Total Operating Revenue

$27,745

$29,402

$28,058

$30,038

$24,845

$28,806

$168,894

Other Sources of Cash Inflows

Proceeds from sale of assets

$0

Funds borrowed

$20,000

$20,000

Tax refund/rebates

$0

Other sources of cash inflow

$0

Total other cash inflows

$0

$20,000

$0

$0

$0

$0

$20,000

Total monthly cash inflow

$27,745

$49,402

$28,058

$30,038

$24,845

$28,806

$188,894

Cash Outflow

Inventory (Stock)

Stock purchases

$12,012

$13,728

$25,740

Other Cost of Goods

$0

Total Cost of Goods

$0

$12,012

$0

$0

$13,728

$0

$25,740

Fixed Expenses

Salaries and wages

$1,800

$2,200

$2,500

$3,500

$3,900

$4,100

$18,000

Advertising

$200

$200

$200

$200

$200

$200

$1,200

Rent

$300

$300

$300

$300

$300

$300

$1,800

Equipment hire/lease

$5,000

$5,000

Depreciation

$0

$20

$20

$20

$20

$20

$100

Electricity and gas

$200

$120

$150

$230

$130

$170

$1,000

Insurance

$200

$200

$200

$200

$200

$200

$1,200

Legal fees

$50

$50

$50

$50

$50

$50

$300

Transport/courier costs

$120

$90

$68

$85

$95

$82

$540

Postage, telephone and fax

$30

$31

$23

$28

$48

$30

$190

Stationery

$20

$23

$24

$30

$31

$31

$159

Repairs and maintenance

$40

$34

$27

$61

$20

$58

$240

Marketing survey

$300

$300

Design and testing

$400

$400

Patents

$150

$150

Copyright registration

$120

$120

Recruitment and selection

$200

$200

Water bills

$44

$28

$21

$34

$43

$30

$200

Construction

$3,000

$3,000

Office set up

$1,000

$1,000

Distribution

$50

$30

$49

$61

$40

$34

$264

Total Fixed Expenses

$13,224

$3,326

$3,632

$4,799

$5,077

$5,305

$35,363

Other Expenses

Bank Interest

$0

GST

$335

$435

$770

Total Other Expenses

$0

$0

$335

$0

$0

$435

$770

Other Cash Outflows

Purchase of assets

$20,000

$20,000

One-off bank fees

$0

Principal Loan repayments

$0

Payments to the owner/s

$0

Investment of surplus funds.

$0

Other cash inflows

$0

Total Other Cash Outflows

$0

$20,000

$0

$0

$0

$0

$20,000

Total Monthly Cash Outflow

$13,224

$35,338

$3,967

$4,799

$18,805

$5,740

$81,873

Difference of Inflow and Outflow

$14,521

$14,064

$24,091

$25,239

$6,040

$23,066

$107,021

Cash balance at the end of each month

$64,521

$78,585

$102,676

$127,915

$133,955

$157,021

$664,673

Figure 7. Cash Flow Projection for iScent

Balance Sheet Projection for December 31, 2014

Assets

Liabilities and Equity

Current Assets

Current Liabilities

Cash in bank

$ 307,751.00

Accounts payable

$ 33,120

Accounts receivable

$61,430.00

Interest payable

6,700

Inventory

$42,100.00

Taxes payable

3,200

Prepaid expenses

$ 400.00

Notes, short-term (due within 12 months)

20,000

Other current assets

1,350

Current part, long-term debt

12,000

Total Current Assets

$413,031

Other current liabilities

1,4

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