Managerial Accounting: Analysis of On the Beach's Expected Results, Contribution Margin, Cash Position, and Predictions for 2020

This article discusses the importance of budgeting in financial planning and analyzes On the Beach's expected results, contribution margin, cash position, and predictions for 2020. It also explains how contribution calculation helps analyze profitability at the product level and emphasizes the need for smooth execution of budgetary plans.

Managerial Accounting
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Contents
Introduction...........................................................................................................................................3
Overview of the expected results of 2019..............................................................................................4
Analysis of contribution margin of the products....................................................................................6
Analysis of the cash position of the business.........................................................................................8
Analysis and predictions for 2020.......................................................................................................10
Conclusion...........................................................................................................................................11
Bibliography........................................................................................................................................12
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Introduction
In order to manage a production facility smoothly, it is important the management plans and
budgets the requirements beforehand. We have been presented with the projected data of “On
the beach” manufactures. Using this data we have calculated various budgets of the company.
Budgeting is a very important part of financial planning (Adelaja, 2015). Budgeting helps the
management lay down a path which helps them to achieve the goals. It is a complex process
which requires collection of data and then application of such data in order to retrieve
information (Atkinson, 2012). In our discussion below we have discussed about the projected
results of “On the Beach”.
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Overview of the expected results of 2019
We have used the projected data of the company related to its various segments in order to
calculate the expected results for the upcoming year. To start with the planning, the
management has first estimated the units which are expected to be sold, for various products
over the year2019.
The following graph shows the units which are expected to be sold for various products over
the year 2019:
Jan/19
Feb/19
Mar/19
Apr/19
May/19
Jun/19
Jul/19
Aug/19
Sep/19
Oct/19
Nov/19
Dec/19
Jan/20
Feb/20
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
One-piece
Board shorts
Towels
Beach Bags
The graph above shows that the maximum demand of the product is expected to be in January
in2019 after which the demand is expected to decline.
Taking this as the base requirement all the functions like purchase, distribution, production
etc are to be planned. Using these production units the purchase of materials and availability
of labour will be planned.
The management has planned to maintain the inventory level at 50% of the requirement of
the next month, using which we have calculated the production which is required to take
place.
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Jan/19
Mar/19
May/19
Jul/19
Sep/19
Nov/19
0
1000
2000
3000
4000
Total Units Produced
Total Units Produced
Taking this data we have planned on planned on purchase of materials and availability of
labour and machine hours. It is important to allocate the resources so that maximum returns
with the existing resources can be achieved.
The management has also estimated manufacturing cost and other operating cost in order to
determine to total cost of production. Taking all the revenue and cost data compiles by the
management we have arrived at an estimated profit levels of the company. The expected
profits of the company are expected to be as follows:
Budgeted Income Statement for the year ended 31
December 2019
Sales $ 23,58,600
Less cost of goods sold $ 17,91,730
Gross margin $ 5,66,870
Less Operating expenses
Utilities $ 600
Insurance $ 6,000
Administrative Wages $ 30,000
General Office Expenses $ 18,000
Rent $ 16,800
Interest $ 14,800
Total Operating Expenses $ 86,200
Net Income $ 4,80,670
Therefore, form the data collected by the management, it is expected that the company will
generate profits of approximately 0$.4 million in the year 2019.
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Analysis of contribution margin of the products
The company in engaged in manufacture of four products- one piece, board shorts, towels
and beach bags. One piece is the product that is the major attraction for customers. In order to
evaluate the profitability of all of the products we have calculated contribution for each of
them individually.
Contribution is the amount net of sales and variable cost. The contribution per unit is divided
by total fixed cost in order to arrive at breakeven point. Breakeven point is the point at which
the company has no profits or loss; at this level all the revenues are equal to cost (Berry,
2009).
The following table shows calculation of contribution for each of the products:
Particulars One-piece
swimsuits
Board
short Towel Beach
Bag
Sales 100.00 80.00 50.00 45.00
Less: Variable Cost
Direct Materials 34.25 34.25 31.50 26.50
Direct Labour 28.00 21.00 11.20 16.80
Manufacturing Overhead (Variable) 3.00 2.25 1.20 1.80
Contribution 34.75 22.50 6.10 -0.10
One-piece
swimsuits Board
short Towel Beach Bag-5.00
-
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
Contribution
Contribution
Therefore, from the above we can see that the product that provides highest contribution is
one piece swimsuits. The company should keep focussing on the production of its main
product. The contribution earned by board shorts and towels are sufficient and positive, hence
they are expected to be profitable for the company. The contribution earned form beach bags
are negative. This indicates that the cost of production of beach bag is more than the sales
price. Production of beach bags will result in losses for the company. The management
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should either stop the production of beach bags or increase its sales price so that it does have
to incur losses.
Therefore, we see that contribution calculation helps us analyse the profitability at product
level. This can help us improve cost and also assist management in pricing policy (Bierman
& Smidt, 2010).
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Analysis of the cash position of the business
Cash is a very important part of a business. It is important that the business keeps and
maintains its level of liquidity in order to ensure smooth running of the functions. Lack of
liquidity may result in cash crunch for the company which might affect the operations. Affect
on the operations of the business will harm the productivity which will then harm the
profitability of the business (Datar M. S., 2015). Therefore, it is important that the
management plans its cash position before hand in order to avoid situations of cash crunch.
While making the budget the management plans for a cash cycle. Cash cycle refers to the
period in which we can expect to collect the dues form the debtors and pay the dues to
creditors (Boyd, 2013). Taking this cash cycle, the management prepares for cash budget,
which helps the management check for availability of cash so that dues can be met.
Following is the expected cash balances of the company expected for 2019:
Total cash Receipts
Total cash
Payments Cash Balance
January 3,20,980 2,30,768 1,32,462
February 2,77,860 1,91,538 2,18,784
March 2,45,060 1,68,118 2,95,725
April 2,08,364 1,18,686 3,85,403
May 1,25,864 83,680 4,27,587
June 87,256 79,755 4,35,088
July 83,800 87,542 4,31,346
August 93,184 1,37,354 3,87,176
September 1,96,132 1,81,659 4,01,649
October 2,34,340 1,82,961 4,53,028
November 2,30,500 1,97,816 4,85,713
December 2,60,080 2,22,836 5,22,956
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January
February
March
April
May
June
July
August
September
October
November
December
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Cash Balance
Total cash Payments
Total cash Receipts
The above graph shows us the level of cash receipts, payments and balances expected for the
year 2019. We see that the cash balance of the company increases towards year end. This is
due to rise in accumulated profits. The business witnesses decline in the cash receipts and
payment initially and then at the end recovers.
The company is expected to have proper level of cash at each month end. It is unlikely that
the business will face situation of cash crunch. In case of excess availability of cash, it is
important that some cash is withdrawn. The company loses interest on the idle cash. The
spare cash left with the management can be utilised to increase the value of the business
(Datar S. , 2016).
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Analysis and predictions for 2020
The basis of projection on which the budgets are made, need to be based on actual facts and
market study (Dayananda, Irons, Harrison, Herbohn, & Rowland, 2008). The management is
required to study the demand for the product which is likely to happen in the upcoming years.
This is the matter of thorough market study and customer research. We have used the data
collected by IBIS world in order to project the sales information for 2020 (IBIS World). The
forecast shows growth of 0.8% in the business related to retail industry. We have used this
rate to calculate the estimated sales for “On the Beach” for the year 2020:
Expected demand for 2020
Sales One-piece Board
shorts Towels Beach Bags
Jan-20 1,814 1,613 202 403
Feb-20 1,411 1,109 181 302
Mar-20 1,310 1,169 161 262
Apr-20 1,008 1,008 121 141
May-
20
403 605 60 81
Jun-20 403 504 40 40
Jul-20 403 504 40 40
Aug-20 605 403 40 81
Sep-20 1,310 1,169 161 262
Oct-20 1,210 1,109 181 302
Nov-20 1,210 1,109 181 302
Dec-20 1,512 1,210 202 403
Therefore the above table shows the expected growth of 0.8% in the business of retail
industry for the upcoming year. IBIS world also estimates that the increase in revenue for the
retail industry is expected to be by 1.2%. Using this data we have projected the sales price of
the units of various products:
One-piece swimsuits Board short Towel Beach Bag
Selling Price 101.20 80.96 50.60 45.54
Therefore taking the data collected by the IBIS world, we see that the revenue for the retail
industry is likely to increase by 1.2%. The projections made by management should be based
on such statistics which are calculated using sufficient evidence and study (Holtzman, 2013).
The management can make budgets based on this information.
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Conclusion
From the above analysis we can see that management has made use of various budgetary
tools in order to pre-prepare a path for the working for the next year. The management should
take proper care while implementation of such plans (Shapiro, 2007). They should also
incorporate any variances which are likely to affect the business returns. Overall the
profitability of the business for the next year seems fine. Now it is important that execution of
the budgetary plan is conducted smoothly in order to maximise the returns.
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