Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses
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Added on 2023-01-12
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This report provides an analysis of break even point, profit and loss statement, and balance sheet for a financial management case. It includes recommendations on which project to choose based on the analysis.
Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses
Added on 2023-01-12
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B09888 FINANCIAL MANAGEMENT
Table of Contents EXECUTIVE SUMMARY.............................................................................................................3 BREAK EVEN ANALYSIS:..........................................................................................................4 Profit and Loss Statement and Balance Sheet Analyses:.................................................................7 Monthly cash flow for the first year of operation..........................................................................12 Projected annual cash inflows for 5 years.....................................................................................13 Cash required by Isaac to start new venture:.................................................................................16 Sensitivity analyses of both projects:............................................................................................19 Upfront fee for the exclusive rights to Alpen Choc:......................................................................21 RISK FACTOR ANALYSIS:........................................................................................................22 CONCLUSION AND RECOMMENDATION............................................................................23 REFERENCES..............................................................................................................................24
EXECUTIVE SUMMARY This report is based on various financial elements such as break even analysis, profit and loss statement, balance sheet, monthly cash flow and annual cash flows. The case presented shows that Issac has provided not complete information’s; thus for calculation purpose data is assumed. The transaction is carried out between two countries; Canada and Germany. Due to different currencies; foreign currency exchange rate for one Canadian dollar (CAD) is taken as 0.64 € Euro, all the transactions will be carried out in Canadian dollar; because Issac is the citizen of Canada and balance sheet and cost of operations has to be calculated for him. Alpen Choc. is chocolate manufacturer company situated in Germany. It is also assumed that foreign exchange rate will be constant throughout the year and no discount is allowed on currency exchange even on bulk purchase. Average selling price is assumed as CAD 160 per kg and there’s no sales tax for any transactions. It is believed that all interests on borrowing are paid on time or there’s no outstanding interest. Cash flow is discounted at rate of 7% per annum (assumption) because inflation rate is between 5.19% to 8.15%, therefore interest paid on borrowings are taken as discounted rate for cash flows; all other factors such as environment change, increase in demand, competitors entry and fluctuation in inflation rate are remain constant. Total average monthly sales are taken as 400 kg per year; it is the average of average of starting month sale 50 kg and ending month 750 kg. Company will order monthly stock at a time. Issac has two alternatives; either sale through internet or his friend Jade. For calculating equity capital at Liability side; it is assumed that Isaac would invest whole retirement amount into the business.
BREAK EVEN ANALYSIS: Break-even Analysis (BEP): Break-even analysis shows a point of sale where company attain the situation of no loss no gain; means it is a point where if company increases sales, it will gain profit and moving below the point result in loss. In straightforward words, the make back the initial investment point can be characterized as a point where complete (costs) and all out deals (income) are equivalent (Brigham and Ehrhardt, 2013). Break-even analysis shows the original investment point can be portrayed as a point where there is no net benefit or deficit. The firm just earns back the original investment. Issac has two alternatives which is either he can sale 4800 kg annual chocolates through internet or 1200 boxes annually chocolate to his friend Jade. Project 1 4800 kg AnnuallyCADCAD Selling price per kg160768000 Less: Variable cost per kg: Packaging and Shipping6 Purchases113 Handling fee @ 1.2% per sale1.920121580416 Contribution per Kg39187584 Period cost (Fixed Cost): Total cost to sales (annual) @ CAD 2,500/month - 30000 Rent @ CAD 3,500/month - 420007200072000 Net Profit115584 Working Note: Handling fee per order (400 kg at a time) = 400 kg × 160×1.2% =768 Per Kg Handling feeCAD 768/400 Kg =CAD
=1.92/Kg PurchasesisconvertedintoCanadiancurrencyfromeurowhichisCAD113perkg Break even point (Units) = Fixed cost/ Contribution per unit =CAD 72000/39 per Kg =1846 Approx. 1846 units Break even point (CAD) =Breakevenpoint(units)×Sales priceperkg =1846×160perkg =295360 CAD 295360 Interpretation:Onthebasisofabovecalculation;itcanbeinterrelatedthat Isaac is facing total net annual gain of approximate CAD295360. Because it’s total annual net sales is more above than the break-even point of 1846 kg and its total breakeven sales is below CAD 74,880. If Isaac manages to increase its sales above break- even point then it will be rewarded for every extra per kg sale. For handling charges per order calculation; size of every order is taken as 400 kg per month, number of order per year will be 12 (Brigham, 1996). Project 2 1200 boxes annuallyCADCAD Selling Price per box4554000 Less: Variable Cost / box Purchases28 Boxes and Decorative cost/box843200 Contribution cost /box910800 Period cost (Fixed Cost): Assistant Expenses Annually @ CAD 500/month60006000 Net Earnings4800
Working Note: Total sales = 45×1200 = CAD 54000 Total Variable cost = 8 × 1200 = CAD 44400 Purchase price is divided by to get per box rate Break even point (Units) = Fixed cost/ Contribution per unit =CAD 6000/9 per Kg =667 Approx. 667 boxes Break even point (CAD) =Breakevenpoint(units)×Sales priceperkg =667×45perbox =30015 CAD 30015 Interpretation:Isaac will attain the point of no gain no loss if he sale 667 boxes in a year; in value this can be achieve he generates total sales of CAD 30015 Canadian dollars in a year. He’s income statement through marginal costing method shows that; Isaac is generating annual revenue of around CAD38400Canadiandollars.Witheveryincreasein break-evenpointwillgeneratemorerevenue(Ehrhardt and Brigham, 2011). Which project should be chosen: After matching both project 1 and 2; it is recommended that in long run, Isaac should go with project 1 (selling through internet); because earnings from this project is almost double of project 2. But if Isaac could carry both the projects at a time; it will not increase the burden but average earning from both the project together will decreased (McMahon
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