Financial Implications Of Running A Shoe Business Accounting Essay


Financial implications:

Tax bills are the major one that always comes first into an employer's mind whenever running a business is discussed (Alyssa Gregory). An employer will have to pay income tax so does the increment of tax bill. The amount of tax the employer has to pay depends on the amount of employees the employer posses.

The cost of recruitment should not also be underestimated. The parent company will insist that the recruitment process is carried out in-house which mean the employer will have to decide where or how the recruitment will be. The employer will need enlist the services of an agency which preferably at considerable cost which includes places and interview arrangement (Tanya Willette). The employer also must ensure that the factor of time that every hour the employer spends on recruitment is equal to every hour the profit is generated. If the employer were to choose a agency, the charges from various outset must be understood before it is made. This is because some agencies will charge a percentage of first year salary offered to the employee while others will charge a flat fee.

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The employer also has to assume a range of other miscellaneous responsibilities. The employer has to complete an employer's annual return for Human Resources and Customs as well as a range of in year returns or assessments. Legal responsibilities also have to be aware of. Employees will have to be provided with things like sick pay and maternity leave will eventually cost a sum in financial. As can be seen which recruitment if often necessary for the expansion of the company, a price came by. Therefore it is vital that you understand the cost associated with taking on staff before the employer begin the process of recruitment.

Current Profit/Loss

Based on the context, by using Direct Labour Cost Variance:

By 2002, New Balance has sold 1500 million shoes worldwide. New Balance has 2600 workers and they can produce 10000 pairs of shoe a day. A shoe can be produced in 24 minutes. Labor cost is $1.30 per hour in China. The company recorded 55 million of total labour time.

Total labour hours = Number of Shoes produced x Time to produce one shoe

= 1500 million x 24 minutes

= 60 million hours

Cost of direct labour per shoe = 24 minutes = 0.4 hours x $1.30 per hour = $0.52

Labour Efficient Variance = (60 million - 55 million) x $0.52 = $2.6 million

Based on data given: New Balance Company has recorded sales of 39.7 million in year 2002

Therefore profit/lost = 39.7 million / 2.6 million x 100

= 15.26% (Profit)

Profit/ Loss after venturing into new market

In 2004, New Balance Company has expanded their company and venturing into new market and made 1500 millions in worldwide sales. To calculate the profit or loss of year 2004, formula is given as below.

According to data, U.S athletic footwear is sold $100 each. Where to cost of each shoe based on the researched data is $60 each.

           Profit = selling price - cost price

                       =   $100 - $60

                       =   $40


Expressing the profit as a percentage of the cost price:



         Profit in % =  ------------------------ Ã- 100%

                                Cost Price


                            =  -------- Ã- 100%    =    66.67%


1500 million of shoes x 40$ = 6 billion dollar for net profit of year 2004

Payback of Investment

Payback of Investment in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment.

Net Present Value (NPV)

NPV is the difference between the present value (PV) of all future cash flows

produced by a rental property and the amount of cash investment (or, initial

investment; down payment and closing costs) required to purchase the property

If NPV is greater than 0, then the project is a go! In other words, it's profitable and worth the risk.

If NPV is less than 0, then the project isn't worth the risk and is a advisable not to be invested on it.

Based on the data, in Year 1993, Davis spent $3 million in high-tech gear such as automated cutting and vision stitching machines. This means the cash flow out on year 1993 is -$3 million. The cash inflows are expected to be $0.5 million on Year 1994, $2.3 million on Year 1995, $4.4 million on Year 1996, $6.5 million on Year 1996. A NPV value is calculated using estimated cash inflow for the following 4 years.

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Internal Rate of Return (IRR)

The IRR is a rate of return used in capital budgeting to measure and compare the profitability of investments. The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g. interest rate).

Given the (period, cash flow) pairs (n, Cn) where n is a positive integer, the total number of periods N, and the net present value NPV (assume to be zero for breakeven), the IRR is given by r as follows,

In year 2001, the owner of the company Davis has spent over $14 million to upgrade a high-tech shoe plant in Boston. So cash flow out of the first year is -$14 million. Let's assume this as Year 0. Let us take 4 years to calculate the IRR for this company.

Break Even Analysis

(Quoted from Stanley J Shapiro, Marketing, Break Even Analysis)

Break Even Point (BEP) is defined as the point of production where the revenue is equal to the cost (Daniel Richard). The fixed costs (horizontal line) do not vary with output - they are the costs of running the business. The variable costs (line starting on top of fixed costs) are directly related to volume and increase or decrease as production and sales increase or decrease. Together they add up to give total costs. The revenue line (starting from zero) shows the total sales at a given price and volume. The Break Even Point (BEP) is the point at which the revenue and total cost lines cross.

Below is the definition of each term in the chart above:

Fixed Costs: Fixed costs are those business costs that are not directly related to the level of production or output. In other words, even if the business has a zero output or high output, the level of fixed costs will remain broadly the same. In the long term fixed costs can alter - perhaps as a result of investment in production capacity (e.g. adding a new factory unit) or through the growth in overheads required to support a larger, more complex business.

Examples of fixed costs:

- Rent and rates

- Depreciation

- Research and development

- Marketing costs (non- revenue related)

- Administration costs

Variable costs: Variable costs are those costs which vary directly with the level of output. They represent payment output-related inputs such as raw materials, direct labour, fuel and revenue-related costs such as commission.

A distinction is often made between "Direct" variable costs and "Indirect" variable costs.

Direct variable: Direct variable costs are those which can be directly attributable to the production of a particular product or service and allocated to a particular cost centre. Raw materials and the wages those working on the production line are good examples.

Indirect variable: Indirect variable costs cannot be directly attributable to production but they do vary with output. These include depreciation (where it is calculated related to output - e.g. machine hours), maintenance and certain labor costs.

To calculate the breakeven point of the sales for New Balance Company in Year 2002, by using the data found through articles:

Selling Price of each shoe = $100

The average variable cost = $70

The fixed cost = $30000000

Formula of Break Even Point is given as:

Break even points = Fixed Cost/(Selling Price - Average Variable Cost)

= 30000000(100-70)

= 1000000

This means that New Balance Company will have to sell an amount of 1000000 shoes in order to break even the value.