Natalie Watch - New Wrist Watch Product

MOD000897

Introduction to Accounting and Finance

Title : New Wrist Watch Product

Student ID : 1549282/1

1. Introduction

This is an assignment for MOD000897 Introduction to Accounting and Finance. The title of the assignment is new wrist watch product. In this assignment, we have to create a new wrist watch product. Next, some documents and statements have to prepare to attract our potential investors to invest in our company. First, we have to prepare a marginal costing statement for our product. Next, we have to draw a table and chart to show the break-even analysis. Lastly, we have to prepare cash budget, forecast income statement and forecast balance sheet. The final part of this assignment will include a conclusion.

2.0 Main Section: Business Case

Natalie Watch Sdn Bhd is a new established company. We are seeking for an investment of £500,000 to create Natalie’s watches, which is a new brand of watch enter into the market. Natalie Watch Sdn Bhd is aiming to attract young people nowadays to buy our products and create a stylish watch to build young people’s fashion life. Natalie Watch Sdn Bhd is primarily to create a stylish and durable brand watches, with an affordable price. We have prepared our company’s forecast statements to prove you that we are a good investment.

In Appendix A, we have prepared a marginal costing statement showing the cost of producing each unit of watch and the cost of producing maximum unit in a year, which are 16000 units. We plan to sell the watches at £50 per unit. Thus, the forecast sales for the first year will yield a forecast turnover at £800,000. Besides, the variable cost of producing each unit of watches is £23, which is 46% of the sales revenue. The contribution per unit is £27, which is 54% of the sales revenue. With 16000 units, the variable costs is £368,000.Thus, contribution will be £432,000, which results in fixed cost at £288,000.Therefore, the remaining amount of £144,000 will be our net profit, with a 18% of net profit margin.

In Appendix B, we have prepared a table and graph to show a break-even analysis. In the table, it shows that the sales revenue, variable cost, fixed cost and total cost in different volume. When the volume is 0 units, which means that our company did not produce any output, the sales revenue and variable cost is £0. However, the fixed cost and total cost is £288,000.This is because even though our company did not produce any product but we still have to paid the fixed cost. When the volume is 16000 units, which means that our company have reached the maximum output by using all the capacity, the sales revenue is £800,000, variable cost is £368,000 and the total cost is £656,000.The fixed cost remain unchanged at £288,000 even though the volume increase or decrease.

There are four lines show in the graph which is sales revenue, variable cost, fixed cost and total cost. The volume of output has been presented on the X-axis (horizontally) whereas cost has been presented on the Y-axis (vertically). The total revenue line and the total cost line cross each other. The point at which they cross each other is the break-even point. Notice that the total cost line is above the total revenue line before the point of intersection and below after the point of intersection. It means that the business suffers a loss before the point of intersection and makes a profit after the point of intersection. The break-even point in the graph that we have sketched is 10666.67 units or £533,333.33. The margin of safety is the difference between the maximum volume of output (160000 units) and the break-even volume (10666.67 units) which is 149333.33 units.

In Appendix C, we have prepared our forecast cash budget. Cash budget is a budget or plan of expected cash receipts and payments. Therefore, we need to prepare cash budget to estimate our company’s cash position in the future. In the beginning of the year, there will be cash sales and credit sales. The total of our cash sales are £580,000 while credit sales are £200,000 which does not include the first and second month’s credit sales since the payment has not been received. Besides, the total cash purchases are £341,000 while credit purchases are £99,000 which does not include the first month’s credit purchases since the payment has not been paid. Moreover, there are some prepayment in the cash budget, such as insurance and rent. For example, insurance costs £500 in January until November and £1000 in December. This means that we overpaid £500 for the next year. There are also some accruals in the cash budget, such as utilities and telephone. For example, utilities cost £1000 in January until November and £0 in December. This is because we did not pay for December. The total of forecast receipt is £1280, 000 which including the capital, whereby forecast payment which include the drawings of £6000 will lead to £771,000. After deducting, our bank account balance becomes £509,000 at the end of the year. By using cash budget, our expected receipts and payments have been clearly recorded monthly throughout the 12 months period. Therefore, we will compare with the actual figure carefully.