Expert answer:Course Project Starting A New Company
Expert answer:Okay this is the final of the paper and please make sure everything correct and do not waste the time if you cannot. SEE THE PAPER BELOW TO FINISH THE PROJECT AND PLEASE EDIT THE PAPER TO MAKE SURE EVERYTHING CORRECT. Now you need to sell your product or service. You need to convince prospective lending sources that you can achieve your dreams and build a profitable enterprise.Prepare an executive summary and a three-page paper, in APA format, selling your business idea to the lending source of your choice. Remember, you need to be both factual and persuasive.Describe your business.Explain your expenses.Specify your financial needs for the first year.How will you use the lender’s money to create profit and repay the loan?Use your budget as support for your claims. In your supporting evidence you should include a break-even calculation in dollars to strengthen your repayment plans discussion.Be sure to format your paper and cite any sources using APA style.Assignment 2 Grading CriteriaMaximum PointsExecutive summary20Break-even calculation40Master budge70Written analysis80Conclusion20Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources using APA style; displayed accurate spelling, grammar, and punctuation.20Total:250
20171203051332cost_drivers.docx
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Running head: DISCUSSION
1
Starting a new company
Student’s Name
Professor’s Name
Your course
Date
DISCUSSION
2
Starting BestTaste Company
BestTaste is proposed manufacturing company that will specialize in the manufacturing,
packaging, distributing and selling BestTaste juice. The juice will be manufactured from natural
fruits as raw materials including pawpaw, watermelons, pineapples, tomatoes, among others. The
fruits will be crushed to produce the juice after which processing will take place to produce the
final product. Best Taste juice will be packaged in different bottle sizes after which
distribution to retail stores will take place across the United States and its environs. The
product will reach customers through one-level distribution channel where the company will
distribute to retails stores where potential customers will be reached.
The main source of operating revenue of BestTaste Company will be bank loan, retained
earnings and contribution from shareholders. The loan will be sourced from standard Chartered
bank at an interest rate of 10.99 %. The money from bank loan will be channelled to marketing
operations which will help in creating awareness on the business product to potential customers.
40% of the bank loan operating revenue will be used to advertise in print media including
televisions while the rest will be used to meet logistics and marketing costs. Retained earnings of
the company will also be used to finance operations such as purchasing of raw materials, meeting
labor costs as well as financing expansion. However, retained earnings source of revenue will be
used after the first year of operation. Finally, equity capital (contribution by shareholders) will be
used to finance new projects including meeting costs of research and development.
In addition, BestTaste Company is projected to experience expenses. First is marketing
expenses. Ideally, marketing is an imperative operation in the business operation (Konak, 2015).
Marketing expenses are projected to be $5 million in the first year of operation. The company will
also incur labour expenses in the form of salaries and wages. Finally, office expenses will also be
DISCUSSION
3
experienced which will cater for purchasing of office equipment and stationery.
Moreover, the company will also experience several costs as summarized in the table
below;
Costs
Period cost or
product cost
Direct or
indirect costs
Rent
Period cost
Direct
Direct labour
Product cost
Direct
Office
Period cost
Indirect
Office supplies
Period cost
Direct
Direct material
Product cost
Direct
Administrative
Period costs
Indirect
Product costs
Indirect
depreciation
expenses
Production
overheads
Product costs are only attributable to production or acquisition of the product. Example of
product costs will include direct labour costs, cost of purchasing raw materials (fruits) and
production overheads including equipment setup costs and supervisor salaries among others.
Direct costs are traced and attributed to the final product while it is difficult to trace or assign price
of the final product with indirect costs (Collis, 2016). The direct materials of the BestTaste
Company will be natural fruits including watermelons, pawpaw, pineapples, tomatoes, and ripe
bananas among others. Additionally, direct labor will include workers’ salaries and wages while
DISCUSSION
4
manufacturing overheads will incorporate equipment setup costs, supervisor salaries, insurance on
production, fridge benefits, quality assurance salaries, and property taxes.
Activity Based Costing
Besides activity-based costing that was implemented in my division, additional
manufacturing costs that will also be incurred include indirect costs of the best taste Company.
The costs would be other incurred costs in the manufacturing process other than the direct costs.
Depreciation costs of the company’s’ inventories and assets will be included in the division as
the overall costing of the activities be determined. Specifically, accumulative depreciative
amount including the total projection of the company’s inventories that are subjected to
depreciate over a particular time frame will be analyzed. Other overhead costs will be allocated
for the supervisors within the manufacturing company, those in charge of the quality control,
maintenance costs and related indirect supplies within the company. Similarly, taxes and other
business duties will be considered as manufacturing overheads within the division. They are
normally those expenses that are existing outside the company’s activity costs. To allocate these
expenses to the division is challenging since there are no direct relationships that exist between
the costs and the units produced. Therefore, I will have to assess the value of the manufacturing
costs itself and calculate based on the value of the units of fruits that are generated by the
company. Some of the manufacturing costs, however, will be added to the division based on their
assessed values other than the number of units of products manufactured by the company (Foster
& Swenson, 2017).
DISCUSSION
5
Activity-based costing will produce the more realistic picture in the divisions incurred to
produce more revenue since the method is highly objective. The activities which are determined
are usually realistic and focused on the determination of products and service costs. The
overhead costs are usually identified first then each is allocated based on the cost of driving such
products. The expenses help in determining the values and effects relationships between the
products manufactured within the company and the overall costs that will be incurred on every
adjacent activity applied in the process (Foster & Swenson, 2017). Similarly, the method is
deemed realistic as it gives more accurate information about the products and service costs
utilized within the company’s activities. Thus, it provides a more understanding approach to
understanding the overall cost behavior within the manufacturing process of the company. The
management and head of the division will be able to provide a critical analysis of the overhead
costs since most prompting activities is controlled using the method. Therefore, general
performance of the company will be bettered by reducing the costs of expenses. Accumulating
and differentiating such values from the direct cost of enhances the general efficiency of
operations hence increase in the performance.
The costs within the departments will be more profitable with the specification of the
valued products. Determining the number of products that the customers will be willing and able
to will be largely dependent on the overall value of the products and costs that are attached to the
services that are produced within the company (Poppendieck, 2011). Not only the application of
the activity based costing shall be responsible for the better performance f the company but also
the value stream of its products and elimination of those processes that add less value to the
overall profitability. The costs and flow of the value stream of products are also highly regarded
DISCUSSION
6
in ensuring a profitable business strategy other than the standard activity-based approach within
the department’s structure.
Best Taste juice will be charged based on production costs and the amount of margin set
by the company. Typically, a company sets a margin based on production cost per unit (Julious,
2011). This is based on the insight that main company objective it to maximize profits.
Therefore, the selling price of Best Taste juice will be determined by two major factors. First,
the cost of production. This is where the company will accumulate total costs used in production
including direct and indirect costs. A margin will thereafter be set. The second factor that will
determine the selling price is size of the bottle. Best Taste juice will be packed in different
bottle sizes. As depicted in the table below, the smallest bottle (equivalent to 300 milliliters)
will be sold at $1.39.
Bottle
size
Selling
price
300
$1.39
milliliters
500
$ 3.20
milliliters
1-liter
$ 5.50
bottle
In the first year of operation, the company anticipates selling 19,500 units of Best
Taste juice. This is inclusive of all bottle sizes (300ml, 500ml, and 1-liter bottle). It is
anticipated that 300 ml bottle of Best Taste units will be higher compared to the 500ml and 1-
DISCUSSION
7
liter units. These units will be sold to customers across the United States and its vicinities.
Although research by Rusko (2015) showed that the first year of operation is challenging for
startups, Best Taste is optimistic that it will gain substantial market share during the first year
of trading.
Since the projected output for this business is 19500 units of juice, it will be shared
across the packaging units of 300 ml, 500ml and finally 1000ml. Therefore through
mathematical calculation, this output will be shared in the ration of 3:5:10 ml of juice. Therefore
this makes us to come up with the approximated number of bottles that will be needed for the
first production of the juice. This will be; 33 bottles of 300ml, 54 bottles of 500ml and 10 bottles
of 1litre of juice respectively. The calculations of expenditure and profit generated from this
business are shown below;
DISCUSSION
8
BOTTLES REQUIRED
Number
actual number
rounded off
32.5
33
54.17
54
10.833
11
Total
98
ml/litres
300ml
500ml
1litre
Direct Cost Incurred
Price
Quantity per Unit
2
$35.00
Item
Labor
300ml
bottles
Total
$70
33
$0.30
$10
54
$0.35
$19
11
$0.45
$0.25
Grand
$5
$38
500ml
bottles
1 liter
bottles
Fruits
150kg
total
$141
TOTAL SALES
Bottle
unit
300ml
500ml
1000m
l
Quantit
y
33
54
11
Total Revenue
Price per Unit (USD)
$1.39
$3.20
$5.50
Grand revenue
Total
Expenditure
Profit
percentage
profit
45.87
172.8
60.5
279.17
141
138.17
49.46%
DISCUSSION
9
Fixed and variable manufacturing cost
Fixed costs are the costs that are associated to product and must be paid regardless of the
volume of the volume of the product sold.
Variable costs are those costs associate to the products and changes depending on the
volume of sales. When sales of the products go up the variable costs also go up while when the
sales go down, so do variable cost (DRURY, 2013)
Manufacturing costs
Variable/fixed
Rent
Fixed
Depreciation of company asset and
Fixed
inventories
Direct materials
Variable
Taxes and other business activities
Fixed
Supervisors salaries and wages
Fixed
Insurance on production
Fixed
Fringe benefits
Variable
Equipment set up
Fixed
Quality assurance salaries and wages
Fixed
Transportation of products
Variable
Contribution margin is the amount that you come up with after subtracting all variable
costs from the revenues. For instance, after delivering my products to the market, the total
DISCUSSION
10
revenue I will get, I will deduct the variable costs to get contribution margin. It shows the
amount the company will be contributing to fixed cost and net income (Braun $ Tietz, 2014)
How do you calculate it?
Contribution margin = revenue − variable costs
Contribution margin = sales – (direct material + fridge benefits + transportation costs)
I will use the contribution margin to, first, pricing my products. I will maximize the profit
by determining the price that maximizes the contribution to profit since my company is a single –
product firm. Secondly, I will cut the products with lowest contribution margin so as to focus the
resources on growing the business and increasing profits (Braun $ Tietz, 2014)
ADMINISTRATIVE COSTS AND BALANCED SCORECARDS
DISCUSSION
11
Administrative costs
According to Aver Kamp et al’s (2003) summary on administrative costs, these are part of costs
associated with controlling and directing of a business enterprise, but cannot be directly linked with
financing, marketing or productions. This means that they would still be incurred even if no production
or sales are being made. The following are the potential administrative costs that could be incurred by
Best Taste manufacturing company.
Rent
Best Taste shall have to incur rent expenses for clerical and managerial purposes. Companies are
required to have a registered office which is registered with the registrar of companies. This makes it
very necessary for Best Taste company to have a registered office which is independent from the
owner’s premises since the company is a legal person separate from its owners.
External audit fees
Being a legal person, the company will obtain funding from shareholders who will be owners of
the company. To prevent conflicts of interest with the management the shareholders will hire an
external auditor to express his opinion on the financial statements of the company to ascertain whether
they give a true and fair view of the company’s financial performance and position at the end of the
year.
Legal fees
These are expenditures incurred when pursuing investment activities, or activities for
generation of income. They can also be defined as fees incurred to defend title to an asset or to
purchase capital asset. Legal fees that aren’t of capital nature aren’t deductible while those that are
incurred while carrying on a business are deductible as business expenditure (Wood and Porter,2009).
Managerial salaries
This are rewards that managers receive for running the businesses as agents of the shareholders
who are the principals. Best Taste company will also incur managerial fees for being a legal personality
and therefore being run separately from their shareholders. Their salaries should be calculated well to
ensure that they are within the industries level and that they do not bring and agency conflict between
the shareholders and the mangers.
Depreciation on office equipment’s
These are monetary values attached to the wear and tear of a company’s office equipment’s.
However, the knowledge that the office equipment’s lose value as they are utilized in clerical work in
the office should not permit the fixing of the depreciation value since it varies yearly (Gordon, 1998).
DISCUSSION
12
Best Taste should choose an appropriate rate of depreciation for office equipment’s and allocate an
appropriate method of calculating depreciation.
Selling and Administrative expenses
Depreciation on office equipment’s
Managerial salaries
Legal fees
External audit fees
Rent of office space
Projected income statement
Months
1
Total
Revenue
Cost of
Goods Sold
Gross
Profit
2
3
4
5
6
7
8
9
1
0
1
1
1
2
DISCUSSION
Admin
Salaries/Bonus
es
Rent/
Mortgage
Equipm
ent Rental
Contra
ct Labor
Market
ing/Advertising
Accoun
ting & Legal
Insuran
ce-Business
Insuran
ce-Health
Travel
Vehicle
s
Deprec
iation
Repairs
& Maintenance
TaxesPayroll
TaxesOther
Teleph
one
13
DISCUSSION
14
Manag
erial salaries
Deprec
iation on office
equipment
Office
Supplies
Office
rent
Legal
fees
Interes
t
Total
Expenses
PreTax Profit
(Loss)
Balanced scorecards
According to Kaplan and Norton,2001 scorecards are crucial tools that are used by managers to
track their performance. The major component of balanced scorecard is the “scorecard” element itself
DISCUSSION
15
which aims at recording and clearly illustrating the small number of key measurements which allow busy
managers to easily evaluate the performance of key areas of a business.
Balanced scorecards are very essential for the management of Best Taste manufacturing
company since it will help the managerial staff in monitoring of specific areas of the business that are
key to its performance and growth. This area according to Kaplan et all’s, 1990 include finance,
customer care, internal business operations and organizational learning and growth.
It helps the managers in identifying and measuring specific value drivers which are essential for
the company to perform well.
It also helps to make sure that the company achieves consistency and alignment between the
financial and the non-financial policies utilized by the company.
Many organizations have also adopted the use of scorecards potential value as a framework for
strategic objectives. They are used in both public and private to place strategy, rather than attaching a
value to the budgets and shareholder return at the center of their management activities (Kaplan et al,
2000).
Types of information in the scorecard that won’t be apparent on financial statements
Vision, Mission and goals of the company. An organization’s mission is to increase shareholders’
value, this can only be actualized through revenue growth and productivity strategies. It can also be
achieved through maximization of customer’s value and the value of good s and services offered to
customers.
Strategies of an organization and its drivers into perspective for example customer-perspective
related strategies, and advancement towards their actualization might be measured through devices
such as customer feedback, a decrease in complaints and returned good.
Value for customers and other stakeholders. This can be ascertained through customer intimacy
and product position in the market are all driven by strategies realized in the internal-activities. They can
DISCUSSION
16
be actualized through the company investing in research and development, increase customer value,
achieve operational efficiency and being a good neighbor through corporate social responsibility.
How to use information a balanced scorecard to improve operations and increase profitability
I as the manager will use balanced scorecard to improve the efficiency of operations by
providing a comprehensive mechanism which translates the company’s strategic goals into a coherent
set of performance strategies which lays down the procedures and policies to achieve success. For
example, in the case of Best Taste company the balanced scorecard will enable me to determine the
performance of the fruit juice in the market and thus enables one to set measure to tackle any
eventuality in the performance measurement.
Align the organization behind a common vision of success, and gets employees working on the
right things in view of achieving high performance. Scorecards information will enable a manger to
develop a workforce that is focused on achieving the right results. In the case of Best Taste company,
the balanced scorecard will produce information regarding to many non-financial aspects of the
company for example customer surveys will yield the specific needs the customers are yearning to
satisfy which will be very key in helping the company produce juice that appeals to their need thus
achieving high performance.
Developing new products. Information obtained from the balanced scorecard iis fundamental in
the research and development department of any company since it measures specific performance of
key areas for example the customer acceptance of the product produces a basis for research and
development of new products, e.g. when the sales of Best Taste starts falling questions will be asked
and a measurement will be done to determine the extent of this trend, the information that will be
obtained will be submitted to the research department to help them develop techniques of making it a
better product than that of their competitors.
DISCUSSION
17
DISCUSSION
18
References
Foster, G., & Swenson, D. W. (2017). Measuring the success of activity-based cost
management and its determinants. Journal of management accounting research, 9,
109.
Poppendieck, M. (2011). Principles of lean thinking. IT Management Select, 18, 1-7.
Julious, S. A. (2011). The ABC of non-inferiority margin setting from indirect
comparisons.Pharmaceutical Statistics, 10(5), 448-453.
Rusko, R. (2015). Challenges of consumer-based innovations and start-ups in ICT
business. International Journal of Techno entrepreneurship, 3(1), 1.
Collis, J. (2016) …
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