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Business ReportV. Okonji
Business Report for Loan Application
Table of Contents
Business Report for Loan Application
Business and Flagship Product Overview
The Rubik’s cube is the largest selling toy in history.
We intend to run a toy manufacturing company, focusing on our flagship product “Speedix Cube”, a premium Rubik’s cube with superior durability.
Rubik’s cubes is a puzzle with multiple interlocked components, which have the ability to shift places, without dismantling altogether.
A traditional 3-layered Rubik’s cube has a common flaw. Certain pieces pop out upon repeated use. Our research team has solved this problem, by adding deeper “hooks” to keep the pieces together even after 10,000 rotations on each side of the cube. What this does is create a Rubik’s cube which is better interlocked.
Demand overview and funding requirement
Since, Speedix will be a premium product in its category; based on third party market research, we expect the international demand for our product for the calendar year 2015 to be at 154,000 units.
To cater to this demand we have a requirement of funding to be a little under £ 2 Million (£ 1,978,050). With this amount we would be in a position to cover our expenses plus a 30% buffer.
Speedix would be priced at Cost plus 25% Margin. We are confident, that once demand picks up, we will be able to raise that margin even higher, because of the technology patent we have for our product. The cost of each Speedix Cube works out to be £ 9.88, thus our selling price has been set at 25% higher to be equal to £ 14/unit.
Manufacturing Process Overview, Direct Material and Direct Labor Costs:
The Speedix cube is made out of premium plastic; we intend to use Grade-A Liquid plastic resin and Granules. Both of these primary materials have been coined as Materials H and C respectively. Further, other components include paper stickers, springs attached to screws, and miniature rods used in assembly at a minimum quantity of 1 each per cube. The components have been called “Component A” and “Component B” respectively. The total Direct Material cost per unit of Speedix comes to £ 2.38.
At first, the manufacturing process involves production of parts of the cube using the Liquid Plastic Resin and the Granules. The ingredients are mixed together, until they melt and form a smooth and viscous fluid. This fluid is then poured into molds which would help create the parts of the cube.
The molding process takes about 0.25 hours per cube that is 15 minutes. Mold specialist workers (called “molders”) charge £ 17.25 per hour for this entire process. Each of the resulting solid parts is then sorted by the molders on to color coded plastic trays. The molding cost per cube works out to £ 4.31.
The trays move over a conveyor belt on the manufacturing line to the assembly division. The assembly division workers have the most critical task of checking quality and consistency of each of the molded parts.
They weed out defective pieces, and smooth out rough edges of the parts through a sanding process. To ensure accuracy, these are scanned under a laser scanner linked to a CPU on the assembly board, which displays any further sanding which may be required. Next, the “core” of the Speedix cube is assembled using the springs and other component parts to finish off locking all parts to place, and adding colored stickers on each side.
The entire assembly process takes place in a little under 5 minutes for each cube (0.075 hours). The labor charge for assembly is £ 35 per hour. Assembly cost works per cube comes to £ 2.63.
Finally, the assembled Speedix cube moves over the conveyor belt onto the Packaging department, which does the labeling and boxing for shipment. This process occurs under 3 minutes per cube and costs £ 6.50 per hour. Packaging costs per cube amount to £ 0.33.
Overheads, Standard Costs, Selling Price Determination and Break even
In addition to the above costs, we would incur the following expenses to run the factory:
As shown in the appendix, the overall Standard Cost as per the Standard Cost card works out to be £9.88 per cube (refer Appendix for details).
Next, with regard to selling price, we wanted to price Speedix at an affordable price, yet higher than regular Rubik’s cubes. As a result we settled at 25% margin on over Standard Cost to arrive at the Selling price. This would bring the Selling Price to £14. In the coming years, we would expect to gain traction and increase our prices as a result year on year.
Although based on the Market Research, we would probably have a demand for 154,000units which translates to £2.156 Million in Sales for the year. Market conditions are affected by a level of unpredictability which is uncontrollable or more commonly known as systematic risk. As a result we have computed the minimum Sales to breakeven (Cole, 2014).
This is done by dividing the Total Fixed Expenses by the Contribution Margin per unit. We have covered this separately in the Appendix, the breakeven sales units equals to 61,746. The logic behind Break even quantity is that, there are fixed costs which are unavoidable and need to be covered by sales. Variable costs being incremental costs are reduced from the Sales price as that many more number of units would be needed to sell for covering potential losses (Caplan, 2006).
Profitability, Review of Cash and Operational Budgets
Next we look at profitability under the demand scenario of 154,000 units. We would expect to be able to earn a net income to the tune of £ 402,262 for the calendar year 2015. This is after covering an Interest cost @ 7%p.a for the 3 year loan of £ 1,978,050. Our operational budget similar to an income statement gives an overview of the total costs and the sales for FY 2015. The Operational Budget however, unlike an Income Statement forecast shows the details of the different materials included in the production, on a monthly basis. It is generally more detailed (refer Appendix below).
For the demand, we have used a random number between 12,000 units and 13,500 units to simulate real life conditions. Since, the product is intended for sale in the international market, we have assumed seasonality in one country is offset by demand in another. Accordingly we have plotted sales, and also created the Cash Budget (Grimsley, 2014).
Beginning with a zero cash balance, we expect to end the year with a healthy Cash Balance of £ 2,580,473, however, this includes the loan taken amounting to £ 1,978,050, and interest payment at the end of the year of £ 138,464. In the first month, the payments will be lesser relatively, totaling to £ 91,300, as the credit terms meant that only labor payments get due and paid in the same month. All other payments are delayed and paid according to the respective credit terms. Similarly, there are no Customer collections for credit sales in January, which are due the next month (Simplestudies LLC, 2012).
The operational budget however does not consider the actual cash payout like the cash budget; instead a monthly operational budget covers the expenses as they accrue for a month. Unlike the operational budget the cash budget also shows the interest payout at the end of December, when it is actually paid out instead of being accrued under Office Overheads over the course of 12 months (Caplan, 1992).
To summarize, we intend to carry out producing our flagship toy Speedix Cube to the International, which has an entry selling price of £ 14 per piece. This has a Standard Cost of £ 9.88, which is arrived at including Direct Materials, Direct Labor and Overheads. The overall loan funding we require in order to cover our annual expenses plus a 30% buffer amounts to £ 1,978,050.
We wish to take the loan and repay it in 3rd year. Each year, we will be paying the interest cost which amounts to £ 138,464. The overall sales for the year are estimated to cross £ 2 million at £ 2,156,000 by selling 154,000 units, based on Market research estimates. However, the minimum units of sales to breakeven come to 61,746.
In order to manage activity and funding, we have prepared a cash budget, an operational budget and a forecasted income statement. The highlight would be ending the year with a Net Profit of approximately £ 402,462.
Management Accounts are prepared to allow users, mainly top management personnel information to aid in decision making. Some the advantages are as follows:
- It helps the management to plan and strategize operations for the year to meet demand.
- Expenses can be scrutinized and effective control can be placed using detailed management accounts.
- Cash budgeting also helps management to gauge the impact of working capital replenishment, and whether or not they will be in need of funding externally.
- Management accounting also helps management to make decisions such as Make or outsource, accept an additional order or not, etc.
(Bruggen, et al., 2008)
- Standard Cost Card
- Breakeven Point
- One Year Operational Budget
- Cash Budget
- Forecast Income Statement
Bruggen, A., Krishnan, R. & Sedatole, K., 2008. Management Accounting Determinants and Economic Consequences of Production. [Online] Available at: http://arno.unimaas.nl/show.cgi?fid=19262 [Accessed 08 Nov 2014].
Caplan, D., 2006. Management Accounting Concepts and Techniques. [Online] Available at: http://www.albany.edu/~dc641869/Chapter05.htm [Accessed 10 Nov 2014].
Caplan, E. H., 1992. Managerial accounting (Social aspects). Management International Review, v32(Annual), pp. 15-17.
Cole, P., 2014. Annualizing: Small Businesses. [Online] Available at: http://smallbusiness.chron.com/calculate-annual-break-even-units-revenue-68275.html [Accessed 08 Nov 2014].
Grimsley, S., 2014. Courses:Education Portal. [Online] Available at: http://education-portal.com/academy/lesson/profitability-ratio-definition-formula-analysis-example.html#lesson [Accessed 10 Nov 2014].
Simplestudies LLC, 2012. What are the budget types in accounting?. [Online] Available at: http://simplestudies.com/what-are-budget-types-in-accounting.html [Accessed 09 Nov 2014].