The company decided to start the manufacturing business that deals in the line of educational tools for children. The company will start with two director, husband and wife and it has been registered with the name “Educational Toys”. Educational Toys will be less profitable in the first year but from the end of the first year, the company will have a steep increase in sales for several years.
Initially, the company planned to offer only three types of education toys. First is the Number toy, a fun related toy that teaches children the number skills and some English words. Second product is the letter toy, which has the name hints and helps to quickly grab the alphabet. Last product is the Phonic toy, an electronic device that functions similar to the mini PC and teaches phonic and math skills. The motive behind this idea is to develop the core skills within kids along with some fun. Currently, the toy industry has recorded a bumper sale of educational toys and has captured almost 30 % of the market (Toy Industry Association, INC. 2010)
The initial fund required to setup and market the product will be £ 140,000 and it is planned to make repayment of the principal amount in equal instalments starting after one year from the establishment date.
Educational Toys is a new company that has developed three types of educational toys. The toys are called educational toys because they provide some learning with fun involved in it to children. The company has planned to market the products within the U.K only with future consideration of the global distribution. Educational Toys is privately held company with husband and wife as the principal shareholders. The main objective of the management is to create a profitable company, research and develop innovative educational toys, and enhance the knowledge of children through the use of interactive toys. So, to achieve the objectives, the company has the mission to make the highest quality educational toys and introduce new features that help children to learn more from toys. Management also decided to trademark “Educational Toys” as its brand name (GOV.UK. 2012).
At the initial stage, the company wants to market and sell only three products-Number Toy, Letter Toy and Phonic Toy. All the three types of toys have distinct functions with a variety of options. These educational toys are fun to play with, but at the same time, they are useful in teaching children the required skills. Recently, the company has finished the research on the products and they are almost complete to launch. The details of product features with their cost and selling price are as follows.
In the U.K. the market size of toy products is very huge. There are few large players in this industry and several small and regional manufacturers. The two main competitors of Educational Toys are:
Management decided to keep the selling price of all three products below the competitors’ price to give a high level of competition in the market. Price decided by the cost department is as follows:
|
Product |
Selling Price |
Cost Price |
Fixed part |
Variable part |
|
Number Toy |
£15.00 |
£12.00 |
£2.00 |
£10.00 |
|
Letter Toy |
£17.00 |
£13.00 |
£3.00 |
£10.00 |
|
Phonic Toy |
£25.00 |
£21.00 |
£5.00 |
£16.00 |
The cost department has set the above prices after the price analysis of similar products by the competitors in the same market. This level of price will help the company to gain a new market as early as possible. The prices have been kept low because initially the company wants to grab as many customers it can and in the second year of working, the company has decided to increase the prices of products by some percentage. The price range for different products can provide a competitive edge among different customers, but the quality product with low price will help to attract new customers because of the low cost to be incurred in purchasing similar products (Lucey 2003).
The cost of the product will include both variable, as well as, fixed cost due to the nature of the business. Variable cost of the product will include the material cost, labour cost and variable direct overhead cost, whereas the fixed cost will comprise of fixed overhead only. Administrative cost and selling and distribution cost is not apportion in the cost of the product because it is not possible to divide this cost with the number of products.
|
Particulars |
Number Toy |
Letter Toy |
Phonic Toy |
Total |
|
Variable Cost |
||||
|
Raw material Cost |
£5.00 |
£5.50 |
£8.00 |
£18.50 |
|
Labour Cost |
£3.00 |
£2.50 |
£5.00 |
£10.50 |
|
Direct manufacturing overhead |
£2.00 |
£2.00 |
£3.00 |
£7.00 |
|
Total variable costs |
£10.00 |
£10.00 |
£16.00 |
£36.00 |
|
Fixed Cost |
||||
|
General Overhead Cost |
£2.00 |
£3.00 |
£5.00 |
£10.00 |
|
Total variable and fixed cost |
£12.00 |
£13.00 |
£21.00 |
£46.00 |
|
Un-apportioned Cost |
||||
|
Selling and distribution cost |
£45,000.00 |
|||
|
Administrative Cost |
£35,000.00 |
|
Number of Products and their equivalent cost |
||||
|
Particulars |
Number Toy |
Letter Toy |
Phonic Toy |
Total |
|
No. of Product |
5,000 |
5,000 |
2,500 |
|
|
Cost of the product |
£12.00 |
£13.00 |
£21.00 |
|
|
Total variable and fixed cost |
£60,000.00 |
£65,000.00 |
£52,500.00 |
£177,500.00 |
|
Selling and distribution cost |
£45,000.00 |
|||
|
Administrative Cost |
£35,000.00 |
|||
|
Total |
£257,500.00 |
|
Calculation of Breakeven point |
|
|
Total fixed expenses |
£117,500.00 |
|
Variable Cost |
£36.00 |
|
Breakeven point |
3263.89 or 3263 units |
The break even point of the company will be determined using per unit contribution margin and total fixed cost of the different products. On analysing the break even point it can be said that company need to sell 3263 units to cover its fixed expenses. The expected sales of the products are much higher than the companies break even point. The net present value calculated shows that company will have positive outflow in the coming years which will help to increase the future production in order to grab the new markets (Friedman 2009)
Conclusion
On analysing the operational budget and five years budget income statement it can be concluded that company will be able to generate sufficient cash flow to have a positive net present value. In the first year of working company will be able to sell 4890 units of Number toy, 4580 of letter toy and 2250 units of phonic toy. The total cost of the product will be £ 193,200 and net profit will be 14,260. The break even units of the company product will be 3263 units that show the company will get higher amount of safety margin that will improve overall earning of the firm. The firm will earn cash inflows as per given below table:
|
1 year |
2 year |
3 year |
4 year |
5 year |
|
£ 14,260.00 |
£26,862.00 |
£ 45,921.90 |
£62,217.53 |
£85,749.60 |
On the basis of above calculated cash inflows the net present value will be £30,960 with the consideration of five years income statement. (See appendix). The firm will earn sufficient amount of profitability and cash inflows to repay the bank borrowings that will also enable it to growth as large scale in the market (Drury 2005).
This activity will help to understand the use of creative thinking and financial analysis in the business plan. It helps in learning various ways to present the cost data in the cost sheet and also provides the guidance on operational budget and forecast income statement. This activity tells how to do planning for the new business, how to find the investors, and also prepare the students to become a good entrepreneur. It shows how to calculate the break even point and net present value of the business. It also assists on how to make use of budgeted figures to conclude with the net borrowings and repayment schedule.
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