A Business Report On The Forecasted Analysis Of Play & Learn Company With A New Product

1. Company Overview 1.1. Our mission and history Play & Learn is an exciting start-up company whose objective is to emerge as a profitable company that develops educational toys for children aged 5-12 years. The proposal is to build a toy that resembles minicomputers which teach children phonics and calculation. Our toy will not only be exciting and appealing to our targeted market, but is guaranteed to give an enriching experience. In light of our successful experience in the industry and potential in the rapidly growing toy industry we aim to expand our business coverage from local neighbourhoods to all of London. 1.2. Key to success We have learnt that our venture's success will be dependent on focusing customer to follow continuous product improvement by developing creative and appealing toys and adopting stringent financial control (Zwiling, 2014) 1.3. Start-up requirements To successfully start our business, we estimated a fund requirement of £1,506,885 at interest rate of 7% per annum payable in three years - each month interest and portion of principal will be paid to the bank. The loan repayment schedule for the first year is illustrated in table 1 below:

1.4. Product Cost and its Selling Price Based on the generally accepted accounting principles and international financial reporting standard we have derived our product cost to be around £42.86 per unit, which includes direct material, direct labour, component cost and production overhead. Based on the production cost we have planned to sell our product at a mark-up of 52% on cost at a steady rate of £65.00 per unit for the whole year. (Appendix 1)

2. Cost Structure 2.1. Product Cost Product cost is derived by accumulating prime cost and production overheads. Prime cost includes the cost of materials used for production, cost of direct labour hours incurred and cost of components used. Direct material cost consists of the following ingredients: . 8 grams of A @ £0.75 per gram, . 2 grams of B @ £4.50 per gram, . 1 Kg of C @ £1.5 per Kg, . 25 ml of G @ £0.35 per ml and . 2 litres of H @ £1.25 per litres All the direct material ingredients collectively put the direct material cost at £27.95 per unit. To produce each unit: . 30 minutes of labour is required payable at £6.5 per hour and . 15 minute of labour is required payable at £17.25 per hour It makes the direct labour cost to be £7.56 per unit. From the component cost basket, . 5 component of A @ £0.25 and . 3 component of B @ £1.75 A cost of each unit at £6.5 was used to cumulate the component. Cost accounting is an important process of distributing expenses. The important component of cost accounting is distributing manufacturing overhead or production overhead. Production overhead accounts for all the costs of production that are not directly referred to or included in direct material and direct labour. These costs constitute a substantial share of total production cost; however, due to its nature it's excluded from all direct cost. (Edmonds et al. 2011) Some common types of production overheads are wages paid to workers for inspecting finished goods, machinery supplies such as oil to grease machine, and factory utilities such as electricity, telephone, factory rent, internet service used for designing the product. (Time, 2014) Play & Learn Company Production overhead comprised of all the indirect cost associated with the production of our goods, including expenses such as factory rent, factory maintenance, factory utilities and machine maintenance. Nonproduction overhead cost included in operational budget is administration (staff) cost, office expenses, advertising costs, sales staff and office rent. These costs were scaled down to match the requirement of medium-sized manufacturing company Play & Learn. To incorporate the cost of overhead in the product cost we divide the total cost of production overhead with the number of units produced, this gives us the absorption rate of 0.85 per unit (appendix 1). 2.2. Product Pricing Broadly, the method of pricing the product can be classified into three types, namely: . Cost-based Pricing . Competition-based Pricing . Customer-based Pricing The Company has adopted a cost-plus pricing strategy also known as mark-up pricing. Under this method, to derive our desired selling price we add together the prime cost and production overhead to get the product cost and add to it a mark-up percentage. This method of pricing is not only simple but also assures that production cost will be covered in the selling price, which will yield a sure profit figure with a lesser chance of risk of loss. The rationale for using the Cost-based pricing method is reflected in the advantages of this method, which are (Accounting Tools, 2014): . The method is quite simple and transparent to adopt . Product prices can easily be monitored and adjusted to market competition, as it's based on the majority of the controllable factors inculcated in product costing. . The pricing is also easily justifiable to external stakeholders such as suppliers and distributors. 2.3. Breakeven Analysis: When to expect profit? To demonstrate the sustainability and profitability of the product, breakeven analysis can be used. It is the point at which all the costs incurred by the business, both fixed and variable, are equal to the total revenue earned, thus it determines the sales volume required to cover all the costs. To calculate the breakeven point the following equation is used (Deno, 2011): Breakeven point = fixed costs/ (unit selling price - variable costs) From the figures in operational budget and income statement, we deduce the breakeven point to be 1,734 units (Appendix 2). From the operational budget it can be observed that from the third month of operation the company will start generating profit, since the sales volume is greater than the breakeven point. 2.4. Operational Budget and Cash Budget Analysis Operational budget is the prediction of the income earned and cost incurred from the company's core activities. It is the combination of various budgets such as: i. Sales budget, which shows the monthly sales demand over a defined timeframe and revenue earned against these sales. Since the demand of our toy will be seasonal, the company will struggle in its sales in the first two months of operation, which is reflected in our operational budget. From March the company will pick up its sales momentum, the peak period of sales will be summer vacations and festivals during which the company intends to sell 2,500 units monthly.