Examine the profitability and viability in the production of Braeside distillery's whisky

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BRAESIDE DISTILLERY

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Executive Summary:

The major aim of this report is to advise Braeside distillery on the profitability and viability in the production of its limited edition whisky, called Pure Gold. The best method of identifying the viability of this product, is through the use of a break even analysis, by using the information that are provided, given all factors remain constant. Based on the figures provided, the company would break even after the sale of 3980 bottles of Pure Gold. However, the company should take into consideration other external factors that have the capability of influencing the profitability of the company. This includes external factors like, an increase in the prices of oil, which has the capability of increasing its fixed costs. On an overall perspective, the company plans at producing and selling 30,000 bottles of Pure Gold, and if all factors remain constant, this is a very profitable initiative.

Section 1: Methods of Analysis:

Assumptions and Methods:

For purposes of determining the viability and profitability of this project, there will be a need of using the concepts of the Break Even analysis. This will help the company to identify the point where the sale and production of Pure Gold will not result to a loss, or even a profit (Epstein, 2011). This point of intersection is called the Break Even point. Before the identification of this point, the following are the assumptions that the company should undertake,

  • The company intends to produce 30,000 units of Pure Gold.
  • There is no distribution deals with retailers, therefore, the price of the products remain the same.
  • All costs incurred by the company are consistent.
  • The current exchange rate of 1 pound equals to 1.28 Euro remains the same.

Calculations and Meanings:

The Fixed Overhead costs are 200,000 pounds.

The sales Price per Unit is 75 pounds

The total variable cost per unit is 24.75 pounds

Break Even Quantity = Fixed Costs/ (Sales Price-Variable Costs)

= 200,000/ 50.25

= 3980

Furthermore, for purposes of identifying the profitability of this whisky, there is a need of determining the margin of safety. The following is a formula for calculating the Margin of Safety (MoS),

MoS = (Expected Number of Sales- BEQ)/Expected Number of Sales

= 30,000-3980/30,000

= 0.8673ercentage Representation would be, (0.8673* 100) = 86.73%

MoS = 86.73%

This margin of safety is very high, and this means that the company would make losses if its sales fall by a 86.73%.

Section 2: Model and Insights:

Graphical Analysis:

Q (Quantity)

TC (Total Costs)

TR (Total Revenue)

Profits

0

200,000

0

-200,000

5000

323,500

375,000

51,500

10,000

447,500

750,000

302,500

15,000

571,250

1,125,000

553750

20,000

695,000

1,500,000

805,000

25,000

818750

1,875,000

1056250

30,000

942,500

2,250,000

1307500

By carefully looking at this graph, where total revenue and total cost intercept each other, is the Break Even point. This means that, it is at this point of production, where the company will not make any losses nor any profits (Epstein, 2011). From the calculations and the graphical representation, it is possible to denote that the break-even point is 3980, which is a very low figure. This means that the production and sale of Pure Gold at the conditions identified is a very profitable venture. Furthermore, as previously discussed, the margin of safety of project is very high, which stands at 86.73%. This means that if the sales of the company fall to 86%, the company will still make some profits.

Section 3: Examples of Changes in the Conditions

One of the major areas where the company is vulnerable to is on the currency fluctuations and value (Epstein, 2011). Currently, the value of the currency stands at 1 pound is equal to 1.28 Euro. However, if the strength of the Euro increases, against the pound, this means that the profitability of the company would decrease. An increase in the strength of the Euro would mean that it trades at a lower price of 1.28 against the pound. Take for example; the current exchange rate is 1 pound against 1.28. However, if this price falls to 1 pound against 1.27 Euro, the revenue that the company would get per unit would be in Euro would be, (75*1.27) = 95.25

The current price in Euro is 75* 1.28 = 96

There will be a drop in the profitability of the company by 96-95.25 = 0.75

Based on this analysis, the company should be considerate on the fluctuations in the value of the currency that it uses to trade with, in the Euro Zone market.

Section 4: Problems with the Analysis

Break Even analysis has a number of weaknesses, and the first one is that it does not recognize the discounts that a company receives because of bulk purchasing, or buying products through wholesale. Furthermore, this method assumes that each unit of a product would earn the same revenue, and incur the same variable costs. It further asserts that, the only factor which has the capability of affecting the variable costs are, the volumes or quantity produced by the company (Epstein, 2011). Break Even analysis wrongly assumes that the efficiency of manufacturing will remain the same, throughout the production cycle. Furthermore, Pure Gold is an elastic product, and its sales are influenced by the pricing policy of the company and its competitors. The company may therefore lose, if it constantly increases the price of the product (Epstein, 2011). It is therefore essential for the company to carry out a market research before coming up with a price that would make it achieve a competitive advantage over its rivals.

Section 5: Conclusion

It is possible to conclude that based on the Break Even Analysis, this project is viable. The company would achieve a Break Even point after selling 3980 bottles of Pure Gold, which is less than 20% of its production. However, the company should consider the fact that the Break Even analysis does not factor in changes in the external and internal environment of the company y, such as the level of competition, prices, and currency fluctuations.

Section 6: Recommendations

There are three major ways that the company can undertake for purposes of maximizing its profits (Epstein, 2011). One important method is strategic alliance. This is a method whereby the company should look for partners, in Europe, so that it could use their distribution channels to distribute the products. This will reduce the costs of distributing the products of the company.

Aggressive marketing is another important method that the company should use. The company should use the social media, and other traditional forms of communication such as newspapers, radios and television, to advertise its products. Finally, there is a need of outsourcing some of its production activities, for purposes of reducing administrative and fixed costs.

Bibliography:

Epstein, M. (2011). Advances in management accounting. Bingley, UK: Emerald.

Appendix 1:

Fixed Cost: 200,000 pounds

Variable Costs per Bottle:

Fermentation 2.25 pounds

Taxes 7.50 pounds

Transportation 4.0 pounds

Bottling 2.0 pounds

Marketing 4.75 pounds

Maturing 1.75 pounds

Sales Price = 75 pounds

Appendix 2:

Break Even Point: This is a point where the company does not make either a profit or a loss. The break-even point for the company is,

Break Even Quantity = Fixed Costs/ (Sales Price-Variable Costs)

= 200,000/ 50.25

= 3980

Appendix 3

TC: Stands for Total Costs

TR: Stands for Total Revenue

Total Cost = Quantity * Selling Price

Profits: Total Revenue- Total Costs

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