Sample Business Studies Paper on Mew Mew Cat Food Production

Introduction

This business aims at producing cat food because the number of cats increased because of the need for pets to accompany people due to the Covid-19 epidemic thus the need to produce cat food. Mew Mew company, therefore, intends to invest in manufacturing cat food starting from January 2021. Because of economic development, consumption power has improved, and therefore creating the need for not only paying attention to price but also paying attention to quality (Palepu, et.al., 2020). This business is its brand and will be located in Guiyang city, Guizhou Province in China. The domestic market is more dependent on foreign brands and therefore the business will focus on coming up with their brand which will deal with manufacturing cat food. The business will use raw materials to make finished goods which is cat food. the product will be sold to consumers who we expect to be cat owners both in china and other countries. The business will be established in Guiyang city where labor cost is cheap, so the assembly line manufacturing process will be used since there is quicker and cheap manual labor to put together in sequence from one work station to the next.

The business is expected to be successful because; the business will have a competitive advantage that other companies since there are few in china which produces cat food. The food will be on high demand because it will focus on the health of cats and not focused mainly on, the price of the product. Compare to imported cat food, domestic produced cat food will be cheaper since imported food is attached to extra expenses such as import tax, freight charges and customs duties. The food will be in organic form, which is mostly preferred by Chinese farmers and will also provide better ratios for the cats. Some imported cat foods are not approved for sale in China and can only be bought through private agents or online shopping. Other costs have increased very high, and there are fewer purchase channels, which lead to the growth of fake products to supplement demand.

The company does not expect any expenses on advertising so if the company incurs any expense on advertising, this will be an added expense and this will reduce the projected income for the company. The company will also hope that the rent will not increase for the three years even though there are cases in the context that caters for any changes in the rent to be incurred. Failure of management and production processes is also not catered for so this business project is said to be optimistic since it directs its purposes only on the favorable sectors such as increased sales not to mention the case that would arise if there was a decrease in sales.

Competition is expected from foreign major brands and domestic brands such as brands with different positioning, but the business will have competitive advantages. The business location is in Guiyang city where there is cheap labor and this will be an added advantage to the company compared to foreign competitors where cheap labor may be unavailable to them. The own brand of the company will give it a competitive advantage other than the foreign brands since it is organic food which is mostly preferred by Chinese cat owners.

The business will be financed partially by debt and partially by equity. Financing by debt will be prioritized since the ownership is retained unlike by equity where ownership is divided among the shareholders. There is also tax exemption in profits made by a company financed by a dept which is not the case for companies financed with equity.

 

STARTUP AND COST ANALYSIS

When establishing a new business, start-up costs are incurred. Startup cost can be defined as those costs and expenses that the company will incur during its establishment. Examples of these costs may include costs such as costs of borrowing, technological expenses costs, expenses and research, and expenses incurred on formulating a plan for the business. Startup cost can be divided into pre-opening and post-opening costs. Pre-opening costs at startup are costs such as research costs and costs of borrowed capital. Post opening costs are costs such as costs incurred in product promotion, product advertisement and payment of employees. Startup costs vary depending on the company and each company has its different startup costs. Mew Mew company will incur pre-opening costs such as cost of machinery, planning costs, legal fees, consulting fees, and research costs. The company will also incur startup costs such as costs that will be incurred in product promotion and payment to employees.

The following are Mew Mew company startup costs:

cost of machinery and equipment

planning cost,

property plant and buildings 50000

legal fees,

consulting fees

al the above-listed costs were catered for in the expenses

operational costs

sales commission 15300

salaries 6000

admin salaries 7000

freight out 1700

rent 86700

depreciation 4750

 

utilities 8000

plant 50000

legal consulting registration fees

COST/BENEFIT ANALYSIS

Cost-benefit analysis is a technique applied by organizations to establish and compare the totals of benefits that the firm will enjoy such as profits, compared to the costs or expenses that it will incur in the course of operation. This analysis is mainly applied when a business wants to decide on the direction or action to take and involves calculations of the total benefits against the total costs.

Total cost =3628300

Total sales=5094000

The business will be profitable because the total expected sales exceed the total expected cost making it able to cover for the costs.

The business will make a profit of $1465700

From the above figures, the benefits outweigh the costs at a ratio of 1.4 which is resourceful to the firm. The advantages of this are to help Mew Mew company to determine the course of action that it will undertake. The cost-benefit analysis aids/helps the firm in determining the impact that will be caused by the decisions it chooses.

The difference between the total costs and total benefits guides the firm on whether the decisions made are viable/feasible and in our case, the difference between the and benefits and costs is +1465700

This shows that the company will be profitable and the decisions made are feasible.

Swot analysis

Strengths;

The business engages in the production of high-end products.

This will ensure that there is a marginal increase in the number of sales per annum since the produced goods, in this case, is cat food and it is a high-end product most especially during this period of establishment.

The raw materials are readily available.

The company strategically positioning gives it an already existing availability of raw material which will sustain the project during the entire period of production.

There are no tariffs incurred since the business operates produces domestically.

The business will enjoy its profits since there are no tariffs.

Weaknesses

The business will experience the following challenges;

The targeted population may be irrelevant since the business have not been in operation and hence cannot effectively predict the market of the product.

the factory may not be strategically located since it is not located since locating it on the capital city of China, Beijing would probably be more strategic other than Guizhou.

Inexperienced leadership might be one of the big challenges the company might face in its operation.

Poor internal systems might lead to an entire system failure which means that the entire production process will be terminated and this might cause a huge effect on the firm which may even lead to closure.

Opportunities

The businesses operations are expected to be successful since there is lesser competition from domestic companies.

The prices of raw material are expected to be cheap as the acquisition is made domestically and favourable shopping trends of the customers.

The company may find itself at a better position than other competitors because it engages in the production of organic cat food which is more preferred by Chinese farmers.

Threats

Threats include potential unfavorable changes in government policies

Unfavorable changes in the requirements of the market

Unestablished supply chain problems since the company are coming into the market for the first time and it has not established its supply.

Other companies may also need to venture in the production of organic cat food which may lead to unfavorable competition and this would reduce profits.

BREAKEVEN ANALYSIS

Break-even point in dollars=2,541.49×$90=$228,734.10per year

 

MEW MEW COMPANY
Fixed cost   Variable cost    
Rent  $       86,700 Direct materials-beef    $          30
Depreciation  $         4,750 Direct labor    $             2
Factory repairs and maintenance  $         7,000 Variable overhead    
Utilities  $         8,000   Utilities  $         0.3  
Total fixed factory overhead  $    106,450   Packaging  $         0.2  
General and administrative expenses  $         7,000   Indirect materials-                        Vitamin, Bean  $         0.5  
Sales salaries  $         6,000 Total variable overhead    $             1
    Variable operating cost    
      Freight-out    $             1
      Sales commission    ($90× 10%)    $             9
Total fixed cost  $    119,450 Total variable cost    $          43

 

Selling price: $90 per unit  
Variable costs: $43per unit  
Fixed costs (per year): $119,450  
Contribution margin per unit=selling price – total variable cost per unit=$90-$43=$47  
Contribution margin ratio=contribution margin per unit / selling price per unit=$47/$90=52.22%  
Break-even point in units=fixed cost/contribution margin per unit=$119,450/$47=2,541.49 unit per year

 

Break even units =fixed costs/(selling price -variable costs)

Which =119450/(90-43)

=2542 units

CVP chart

In the graph above, the blue line represents the total fixed costs.

The red line represents the total cost, while the grey line represents the total sales,

The break-even point is the point where the total costs line intersects with the total revenue line.

the two lines intersect at $22870 on the y-axis and 2542 units at the x-axis.

 

BREAK-EVEN GRAPH ANALYSIS

Break-even analysis is done to establish the number of units produced or revenue generated that a company can cater to its costs without making profit or loss.

In break-even analysis, three elements are considered to determine the break-even point. These elements include the fixed cost of production, the selling price per unit and the variable cost per unit.

Fixed costs are the costs that the company must incur and do not vary depending on the production. these costs include costs such as rent and salaries to staff to staff and employees.

Selling price per unit is the price at which a unit of the product will be sold.

Variable costs are the costs which are mot fixed and can be varied depending on the production.

In the graph above, the selling price per unit is set at $90. This is the price at which a unit of the cat food produced by Mew Mew Company will sell in the market.

The variable cost incurred in producing each unit of cat food is $43 per unit.

The company is also expected to incur a fixed cost of $119450. Fixed cost is derived from subtracting all the variable costs from the total costs.

Break-even quantity is therefore calculated from dividing the fixed costs by the difference between selling price per unit and the variable cost per unit as calculated above the graph.

The company, therefore, breaks even when it produces 2542 units and selling them at $90 per unit.

This means that the company will be able to cover its expenses without making profit or loss after producing 2542 units.

The company needs to make (2542 units*$90) = $228780 to cater for its costs without making profit or loss.

If the total units produced exceed 2542 units, the company will be making a profit while if the units produced fall below 2542, then the company will be making a loss. At 2542, the company will be at break even.

Cost Volume Profit Analysis

Factors that will affect the break-even point.

Changes in rent from $86700 to $100000 and this will affect the total revenue.

Reduce the selling price from $90 per unit to &80 per unit.

New fixed costs= $132750

New selling price= $80

New break even = fixed costs/(selling price -variable costs)

= $132750/(80-43)

=$3588 units

CVP Analysis of the new break-even point

 

 

In the graph above, the blue line represents the total fixed costs.

The red line represents the total cost, while the grey line represents the total sales,

The break-even point is the point where the total costs line intersects with the total revenue line.

the two lines intersect at $287040 on the y-axis and 3588 units at the x-axis.

Proforma Financial Statements

 

Pro-forma Income statement

MEW MEW COMPANY                                                                                                                                    Budgeted Income Statement                                                                                                                                          For Years Ended December 31, 2021,2022,2023
  2021 2022 2023
Sales  $        153,000  $           360,000  $           630,000
Cost fo goods sold  $           74,154  $           174,480  $           305,340
Gross profit  $           78,846  $           185,520  $           324,660
Operating expenses      
      Sales commissions  $           15,300  $             36,000  $             63,000
      Sales salaries  $             6,000  $                6,000  $                6,000
      Administrative salaries  $             7,000  $                7,000  $                7,000
      Freight-out  $             1,700  $                4,000  $                7,000
Income before income taxes  $           48,846  $           132,520  $           241,660
Income tax expense(20%)  $       9,769.20  $       26,504.00  $       48,332.00
Net income  $     39,076.80  $     106,016.00  $     193,328.00

 

 

 

Pro-forma statement of cashflows

MEW MEW COMPANY                                                                                                                                    Cash Budget                                                                                                                             2021-2023
  2021 2022 2023
Beginning cash balance  $                –  $  194,720  $  294,154
Add:Cash receipts from customers  $  147,700  $  193,500  $  246,600
Total cash available  $  147,700  $  388,220  $  540,754
Less: Cash payments for      
  Direct materials  $     14,000  $     54,126  $     75,914
  Direct labor  $       3,120  $       4,760  $       5,780
  Variable overhead  $       1,560  $       2,380  $       2,890
  Sales commissions  $     15,300  $     19,800  $     25,200
  Sales salaries  $       6,000  $       6,000  $       6,000
  Genaral and administrative expenses  $       7,000  $       7,000  $       7,000
  Income taxes payable      
  Dividends      
  Interest on bank loan      
      2022 ( 12% × $50,000)    $       6,000  
Total cash payments  $     52,980  $     94,066  $  122,784
Preliminary cash balance  $  244,720  $  294,154  $  417,970
Loan activity      
An additional loan from the bank      
Repayment of loan to the bank  $     50,000    
Ending cash balance  $  194,720  $  294,154  $  417,970
Loan balance, end of year $0 $0 $0

 

 

 

 

Pro-forma Balance sheet

MEW MEW Company                                                                                                                                                                                         Balance Sheet                                                                                                                                                                                                 For year 2021,2022,2023
  2021 2022 2023
Assets      
Current assets      
Cash  $     200,700.00    
Accounts receivable  $             15,300  $           36,000  $               63,000
Raw materials inventory 13230×3.33 44055.9    
Finished goods inventory 1200×43.62 52344    
Total current assets 312399.9    
Non-current assets      
Plant assets (property, plant and equipment) 50000 50000 50000
Less: Accumulated depreciation 4750 9500 14250
Plant assets (net of depreciation) 45250 40500 35750
Total assets 357649.9    
       
Liabilities      
Current liabilities      
Accounts payable  $     130,968.90    
Interest payable      
Total current liabilities  $     130,968.90    
Non-current liabilities      
Bank loan      
Total liabilities 130968.9    
       
Equity      
你的名字, Capital (opening balance) 0    
Add: Investments 150000    
Add: Profit  $       39,076.80    
Less: Loss      
Less: Drawings      
你的名字, Capital (closing balance) 189076.8    
Total equity 189076.8    
Total liabilities and equity 320045.7    

 

 

 

 

 

Discussion

Analysis

Proforma income statement analyses the businesses expenses and incomes to ascertain the profit or loss that the business made during a particular financial year. According to the proforma income statement of Mew Mew, sales were projected to increase over the years, this led to an increase in net income since the expenses were projected to increase at a slow rate.

Proforma balance sheet statement shows the financial position of the business. The statement shows the current and non-current assets, long term and short-term liabilities and finally equity of the company.

Proforma cashflow statements show the investment activities, financial activities and operating activities of the company. From our projections, the investment activities, financial activities and operating activities of Mew Mew company are progressive.

Cost/Benefit analysis was done to analyze the impact of the decisions made by the firm and the course of action to be undertaken. From the results, the firm will be successful since the total benefits that it will derive from its operations outweigh the total costs incurred.

From the balance sheet, the total asset is outweighing total liabilities. The total assets are at $357469 while the total liabilities are$130968. It also shows that the total current assets outweigh the total non-current assets which are better for the firm. By dividing the current assets by the current liabilities, we find the current ratio of 2.39 which illustrates that the firm is at a better financial position.

Possible Outcomes

The business will be profitable as expected.

This is because has already reached a break-even so the costs have been catered for and thus it will sustain itself in the coming years.

The company has more assists as compared to liabilities as evident in the balance sheet. These assets when used accordingly by the firm, it will generate net income and make the firm profitable. favorable balance sheet and cash flow statement show that the firm will be able to achieve its projected goals and also able to ensure that its financial performance is optimized.

The projected net incomes show that it will be profitable.

From the analysis on cost and benefit conducted, it’s evident that the firm will be profitable and successful because after comparing the total costs vs the total benefits, the total benefits outweigh the total costs incurred.

The business should use a well-planned budget, it should adopt the use of a comprehensive business plan, the business should establish well-defined goals and have priorities on how to achieve them, activities of the business should be well monitored, the business should use internal control systems.

 

References

Palepu, K. G., Healy, P. M., Wright, S., Bradbury, M., & Coulton, J. (2020). Business analysis           and valuation: Using financial statements. Cengage AU.