FINANCIAL ANALYSIS

Introduction to accounting and finance

Introduction to accounting and finance

Q1) Key assumptions for financial data

R&D Corporation is planning to launch a new hair care product that would bring a revolutionary change in the highly competitive industry of hair care products. For successful penetration of their product in this highly competitive market, the company has drafted a series of important financial data on the bases of following important assumptions (Bottazzi et al, 2008, pp. 488-512; Fang, 2008, pp. 90-104).

Selling of around 150000 units in first year of operations

Raw material would be purchases from best suppliers

Cost of production would be equally distributed among each unit

Fixed cost would remain constant for all level of activity

Variable cost would be same for all activity

Selling price of the product would remain constant during first year of operations

Company would not required additional space for storing of new product

New product would be manufactured using the existing machines and resources

Company would invest extensively in marketing and promotion of new hair product

Inflation is expected to remain same or increase at a moderate pace

Economic condition would improve

Competition will become stronger with passage of time

Q2) Marginal costing statement

Per unit marginal costing statement and annual marginal costing statement of the new product is being development on the bases of following assumed data

Per unit Material cost = $4

Per unit labor cost = $5

Variable production overhead cost $3

Total variable cost $12

Fixed cost $2

Mark up $4

Selling price $20

Per unit marginal costing statement

 

 

Per unit

Selling price

 

$ 20.00

Direct material cost per unit $ 4.00

 

labor cost per unit

$ 5.00

 

variable production overhead cost

$ 3.00

 

Total variable cost per unit

 

$ 12.00

Contribution per unit

 

$ 8.00

Fixed cost per unit

 

$ 2.00

Profit

 

$ 6.00

Total units to be sold during a fiscal year = 150000

Marginal costing statement of twelve months

sales

 

$ 3,000,000.00

Direct Material cost

$600,000.00

 

Direct Labor cost

$ 750,000.00

 

Direct production overhead

$450,000.00

 

Total direct cost

 

$ 1,800,000.00

Total contribution

 

$ 1,200,000.00

total fixed cost $ 300,000.00

profit

 

$ 900,000.00

Q3) Break Even Analysis

The break-even analysis is a very useful financial tool, as it would provide company with the point at which the revenue of the new product would be equal to the cost associated with that revenue. In other words, the break-even point is also known as the safety margin, which means that at this point of time company has not able to earn any profit but at the same time has not incurred any loss(Gupta & Kohli, 2006, pp. 687-696). The break-even analysis of the new hair product in presented below in both table and graph format.

Break even table (000)

 

 

 

 

 

 

 

Units sold

25

50

80

110

130

150

Cost and revenue

5500

1000

1600

2200

2600

3000

contribution per unit

88

8

8

8

8

8

fixed cost per unit

3300

300

300

300

300

300

Break-even point = fixed cost/contribution per unit

= 300/8

=37.5 units

Margin of Safety = Budgeted output - Breakeven output

= 150-37.5

= 112.5

Q4) Preparation of important financial documents

 

 

 

 

Cash budget (000)

 

 

 

 

 

 

 

Month

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

Nov

Dec

Opening Balance

400

550

680

830

880

975

975

1075

1125

975

900

1000

Receivables

400

430

450

400

420

350

400

300

300

350

400

450

Payments

-250

-300

-300

-350

-325

-350

-300

-250

-450

-425

-300

-350

Closing balance

550

680

830

880

975

975

1075

1125

975

900

1000

1100

Forecasted income statement

For year 2013

Sales revenue $ 3,000,000.00

Cost of sales

$ 1,800,000.00

Gross profit

$ 1,200,000.00

Fixed cost $ ...