Financial Assessment and Resource Planning Brief
Milestone 1 Product Launch Strategy and Planning Brief presented the a product introduced into the market. This new product, Milk Pops breastmilk storage bags, allowsmothers to safely store their breastmilk and feed their babies without the hassle of doing so in public. Compared to products commercially available, the proposed product presents multiple advantages, among which the most important is likely the possibility of maximizing the storage conditions and minimizing the required storage space. In this sense, mothers can store the bags horizontally, thus placing one over the other. Milestone 2 Manufacturing, Production/Resource Scheduling and Inventory Management Brief outlined the different stages in the production process and presented an overview of the necessary resources to accomplish such production.
Thisbrief, Milestone 3, goes a step further in the development of the strategy to produce the Milk Pop bags and introduce them into the market by evaluating the expected financial outcome of such process and analyzing the required financial resources with which to accomplish the shift towards the manufacturing of the new product. This analysis thus uses tools such as the cost/benefit analysis and the evaluation of the financial fitness of the project. Having performed such investigation, the brief presents a critical justification of the incurred costs to achieve the expected benefits.
Economic Fit and Feasibility
As per the analysis carried out, the expected benefits outweigh the prospected costs. As such, the company would benefit from the development of the new product, considering how it will contribute to increasing its profitability. Moreover, the project is not only economically feasible but does not require a that would have, otherwise, difficulted the possible start of the new production process. In this regard, the fact that the production of the new product uses the existing machinery and materials does not only represent a technological advantage but also limits the necessary initial investment, facilitating the shift towards the production of the new product. The initial investment required mainly results from the purchase of the additional plastic sheets considering how the bags use the double of plastic than the plastic bottles is currently manufacturing to provide them with a higher mechanical strength (Yemen & Weiss, 2013).
Cost Benefit Analysis
The operational costs into which the company would incur by producing the new product includes the cost of the utilities, the supplies, the personnel, and the depreciation of the machinery. Besides, considering how the proposed strategy is that of replacing the production of the plastic bottle liners by the new product, it is necessary to find the cost of the lost opportunity of continuing to produce and commercialize the plastic bottle liners. In this sense, accounting for this lost opportunity cost will enable the correct evaluation of the prospected operational costs and compensate the fact that the company will no longer produce the plastic bottle liners to save the money of purchasing new machinery and hiring new staff to include a new production line to provide the new product in parallel to the plastic bottle liners.
As observed from Table 1 presented in the annex, the total operational costs when accounting for the contribution of these entries is of $4,032,500. These total operational costs are calculated as the sum of both the cost of operating the company for the production of the new product and the lost opportunity cost of not commercializing the plastic bottle liners. This lost opportunity cost is equivalent to the revenue that the company currently perceives from the commercialization of the plastic bottle liners, as the company will no longer produce them. This estimate presumes a sale price of each bottle liner of $1.50. The supply cost, on the other hand, accounts for the fact that the company is using a higher inventory considering how the plastic bottle liner use less plastic than the new product. The estimated supply costs account for the information presented by James and Wells (2013), according to which the company pays $0.85 per pound of in the manufacturing of the new product. The personnel costs, on the other hand, presumes that the production of the new product requires at least five technicians to control the correct work of the machinery employed in the production.Lastly, the depreciation cost estimates the annual depreciation of the three plastic extrusion blow molding machines used in the creation of the new product, assuming a linear depreciation model, a lifetime of 8 years and a listing price of about $100,000 each.
The first and most likely most important expected benefit from the commercialization of the new product is the probability of charging a slightly higher price on the bags than the amount charged for the sale of the plastic bottle liners. This higher price accounts for the higher price that customers will be willing to pay for the bags considering their outstanding added value and the facilities it offers compared to the alternative use of the plastic bottle liners. In this sense (Table 2), a sales price of, e.g., $2.00/bag will result in a revenue of $4,680,000, considering the current demand. Additionally, the introduction of the new product will contribute to increasing both customer satisfaction, which will, in the long run, likely lead to an increased market share and an increased sales volume. This value will probably improve on 3-5 years as the company expands its market share as a result of the increased customer appreciation of the new product compared to the plastic bottle liners. A 2% annual growth rate seems reasonable considering the characteristics of the market and the higher appeal of the product to the customers.
Critical Analysis and Conclusion
As observed from Table 3, the implementation of the new product by replacing the current production of the plastic bottle liners by the new product will allow the company to generate a net increase in profit of $647,500. This profit accounts for both the expected benefits of the substitution of the plastic bottle liners by the new product ($4,680,000) and the total operational costs of such a replacement ($4,032,500). As noted previously, this strategy does not require the company to make any additional investments, as it will use the existing machinery, the current suppliers, and the existing workforce. It will, however, require the company to increase the inventory of the in the production of the new product, as they use a higher amount of plastic to provide the bag with the necessary mechanical strength that ensures the bag will not break during the storage or utilization. The break-even point considering the estimated sales price of $2.00 per bag and the estimated costs of $63,471 is seen below. This value is notably lower than the expected annual demand of 2,340,000 units (James & Welsh, 2013).
Sales price = $2.00
Variable costs = $0.17
Contribution margin per unit = $1.93
Fixed costs = $75,000+$10,000+$37,500 = $122,500
Break-even point = $122,500/$1.93 = $63,471
All facts considered, the replacement of the plastic bottle liners by the production of the new product will be a highly profitable project for the company. As such, I would recommend the managers of the company to accomplish such replacement and start producing the new product as early as possible.
Yemen G. & Weiss E.N. (2013). ADAM BURKE AND PBM PLASTICS: MESSAGE IN A
BOTTLE. Darden Business Publishing. 1, 5.
Table 1. Operational Cost Estimation
Annual Depreciation $37,500
Lost Opportunity Cost $3,510,000
Total Operational Costs $4,032,500
Table 2. Benefits Estimation
Revenue (Year 1) $4,680,000
Increased Growth Rate 2% / year
Table 3. Cost-Benefit Analysis
Estimated Operational Costs of Replacement $4,032,500
Estimated Benefits of New Product $4,680,000
Net Increase in Profit $647,500
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