This is a financial plan for a
small fudge manufacturer in
Blagoevgrad. This document
includes all of the costs that
are required for a production
of the best fudge in town as
well as necessary budgets,
income statement, and
balance sheet.
Fudge
Factory
Production of Fudge
Dina Litvinova, Artem
Eremin, Rumina Mateva and
Borys Khodan
1
Contents
Executive Summary ..................................................................................................................................................2
Introduction ..............................................................................................................................................................3
Bill of Materials.........................................................................................................................................................4
Direct Materials ........................................................................................................................................................5
Direct Labor ..............................................................................................................................................................7
Overheads.................................................................................................................................................................8
Depreciation .........................................................................................................................................................8
Rent ......................................................................................................................................................................8
Indirect Materials .................................................................................................................................................9
Indirect Labor .......................................................................................................................................................9
Utilities............................................................................................................................................................... 10
Other Overheads ............................................................................................................................................... 10
Promotional Overhead ...................................................................................................................................... 10
Total Overhead and its allocation...................................................................................................................... 10
Full Costing ............................................................................................................................................................ 11
Break-even Analysis ............................................................................................................................................... 12
Budgets .................................................................................................................................................................. 14
Five-year Budget .................................................................................................................................................... 18
Income Statement and Financial Position ............................................................................................................. 24
What-if Analysis ..................................................................................................................................................... 25
Flexible Budget ...................................................................................................................................................... 26
NPV and IRR ........................................................................................................................................................... 27
Sources .................................................................................................................................................................. 28
2
Executive Summary
In today’s highly competitive business environment it is almost impossible to enter a market niche without a
direct competition. In what follows we outline how we will manage to tackle this formidable task. Fudge,
traditional American candy, has not yet transferred to the Bulgarian market. Therefore, in order for our factory
to become the first producer of fudge in Bulgaria we have to act quickly. The research presented here is based
on real prices and costs. It shows that the final cost per unit for our production is rather low. That is why it is
safe to assume that our cheap prices for a high quality product will attract many customers. We have seven
different varieties of fudge which enables us to target people with different tastes. We found that margin of
safety for all seven varieties of our fudge is at least 20%. We have high fixed costs and we understand that such
leverage is a disadvantage for an emerging business. Still, we are positive about our success because of low
prices and lack of competitors.
Construction of budgets and good planning further affirm our confidence. With their help we will reduce or,
even, eliminate possible production wastes. It also gives us a possibility to closely examine our future activities
and predict possible income. We have used Net Present Value (NPV), Internal Rate of Return (IRR), and Pay
Back Period (PBP) formulas to evaluate future return of investment. NPV turned out to be positive, IRR was
20.5% (this rate is high since investment we require is a loan of $ 10 000), and PBP was 1 year and 8.21 months.
All of these methods for evaluation of the future invested returns indicate that our project is worth
considering. That is why if you are a person who is looking for a business worth investing in, we are a good
choice. We are highly motivated, positive, devoted and happy to bring joy and sweetness to our customers and
investors.
3
Introduction
Once in a while all of us need something sweet. If you are a person who desires a small portion of sugar then
you are on the right track. In “Fudge Factory” our main objective is to produce high quality fudge at an
affordable price. Our customers will face an amazing service and delicious fudge products of seven different
varieties: starting with simplest plain chocolate fudge and ending with gourmet coconut or raisins flavor.
Fudge is a traditional American candy which has rich flavor and is made primarily out of sugar and milk. This
product is very popular on the American market. That is why we decided to bring this incredible delight back to
our community.
Our main target customers are children and their parents. We believe that they all are fond of sweets and they
will be happy to buy fudge from us. All of us have tried fudge in the United States and we believe this product
can be adapted to the Bulgarian market.
Our little factory-store will be working Tuesday-Sunday from 10 am till 7 pm and will be located at:
Fudge Factory
Subra Mall Largo Blagoevgrad
ulitsa "Todor Alexandrov" 2
2700 Blagoevgrad
We are looking forward to meeting you there!
4
Bill of Materials
The stages of our production process are presented in the chart below.
1. Inputs
2. Mixing
3. Boiling
4. "Walking the table"
5. Slicing
6. Packaging and Selling
To make base fudge we need to prepare sugar, corn syrup, milk, and salt. Other flavors are a mixture of base
fudge and additional ingredients (nuts, chocolate, coconut flakes, raisins, Oreos). All base ingredients are
mixed in a pot in this order: sugar, corn syrup, salt, milk. Following that, we carefully boil the mixture while
constantly stirring. We ensure that it reaches the proper temperature (it depends on the current temperature
in the room and humidity). For example, the temperature for the base fudge is 114.58 ⁰C. Afterwards, we pour
hot fudge on a marble table through a strainer in the area designated by metal bars. We cautiously remove the
bars and start stirring fudge with a paddle. As it hardens, we switch to the loafer to give fudge its final shape.
After fudge sits on a table for several minutes, it is ready to be sliced. We use a knife and scrub it with an edger
after every slice. Each slice goes on a tray. We take a slice of fudge off a tray and wrap it in a wax paper. Now it
is ready to be sold.
5
Direct Materials
For producing a batch of fudge (30 slices) we are going to have 1 person working for 1 hour.
Direct materials are mostly needed during the mixing stage of production. To make one batch of base fudge we
need 7.25 kg of sugar, 360 g of corn syrup, 6 g of salt, and 1 liter of milk. Additional ingredients, if needed, are
added during the “walking the table” stage. Those include: nuts, chocolate, coconut flakes, raisins, and Oreos.
Below are presented the necessary materials at each stage of production.
1. Inputs
2. Mixing
3. Boiling
4. "Walking the table"
5. Slicing
6. Packaging and Selling
No DM at this stage
DM – 7.25 kg of sugar, 360 g of corn syrup, 6 g of salt,
1 liter of milk
DM – none
DM – none (if special flavor then we have cost of additional
ingredients)
DM – none
DM – none
The total amount and cost of direct materials for 1 batch (30 slices) are illustrated in the table below.
Sugar
Milk
Salt
Corn Syrup
$
$
$
$
Price
0,96
1,34
3,21
1,32
per kg
per liter
per kg
per kg
Required for 1 batch
of base fudge
7,25
1,00
6,00
360,00
kg
liter
grams
grams
Total per batch
$
6,96
$
1,34
$
0,02
$
0,47
$
8,79
6
We proceeded with a calculation and found that the cost of DM for 1 slice is $ 0.29 (total cost of one batch
which is $8.79, divided by 30 slices that make up one batch).
We present the total amount and cost of any additional ingredients required for special flavors below.
Additional Ingredients:
Price
Required for flavor
Total per batch
Total per
flavored slice
Nuts
$
9,16
per kg
0,15
kg
$
1,37
$
0,05
Chocolate
$
13,04
per kg
0,60
kg
$
7,82
$
0,26
Coconut flakes
$
7,50
per kg
0,10
kg
$
0,75
$
0,03
Oreos
$
18,60
per kg
0,15
kg
$
2,79
$
0,09
Raisins
$
5,44
per kg
0,20
kg
$
1,09
$
0,04
So, the price of the slice is the sum of base and additional ingredient (if any):
Flavor
DM per slice
Base
$
0,29
Oreo
$
0,39
Nuts
$
0,34
Chocolate-raisin
$
0,59
Coconut
$
0,32
Chocolate-nut
$
0,60
Chocolate
$
0,55
7
Direct Labor
Below is the amount of direct labor we need at each stage of production to produce one batch of fudge. It
presents direct labor requirements for one person. The ‘economies of scale’ advantages are negligible. Thus,
for two workers, the DL requirements as well as productivity will be doubled, for three – tripled, and so on.
1. Inputs
2. Mixing
3. Boiling
4. "Walking the table"
5. Slicing
6. Packaging and Selling
DL – 5 minutes
DL – 7 minutes
DL – 10 minutes
DL – 18 minutes
DL – 15 minutes
DL – 5 minutes
Total time required to produce one batch of fudge is one hour for one employee who will get paid $ 3 per hour.
So, the DL per slice is $ 0.1 ($ 3 divided by 30 slices that are produced in one hour of work). Initially, we are
going to employ two workers to make fudge. We note that employing two employees will not have an effect
upon the DL per slice, since only one worker is needed to make a batch of fudge.
Finally, it takes approximately the same amount of time for an employee to produce fudge with additional
flavors.
8
Overheads
We are using traditional method to allocate overheads and based on labor hours. However, first we need to
find total overheads which consist of categories examined below.
Depreciation
First overhead (OH) cost that we need to calculate is depreciation of machinery that was purchased in order to
start the production. For the calculation of depreciation we are using straight line method: historic cost (price
of purchased asset) minus scrap value (amount we can sell an asset at the end of its useful life) divided by
useful life (amount of time we can use an item for).
The calculations using this method are shown below.
Depreciation
Stove
Marble Tables
Stove Pot
Showcase
Register
Thermometer
Total
Total per month
$
$
$
$
$
$
Historic Cost
2 820,00
78,52
138,20
654,35
130,22
46,48
Useful Life (years)
7
10
4
5
3
6
Scrap Value
100
20
0
30
0
0
$
$
$
$
$
$
$
$
Using Straight Line
Method (per year)
388,57
5,85
34,55
124,87
43,41
7,75
605,00
50,42
To find cost per month we simply divided cost per year by 12 months.
Rent
Rent is a rather straightforward monthly cost. In our case the real estate research of Blagoevgrad properties
has yielded that an appropriate place can be rented out for $ 520.69 (see sources).
9
Indirect Materials
In order to find indirect materials per month we divide total cost by useful life and then divide by 12 months.
All of the costs for indirect materials are depicted below.
Indirect Materials
Big Wooden Spatula
Knives
Edgers
Loafer x5
Bar Sets x3
Pedals x3
Scoop x4
Wax Paper
Thermal Gloves x2
Sponges (10 per package)
Gloves
Scrubbles(6 per package)
Strainer x2
Towels
Rags
Aprons
Hats
Mop handle
Bucket (for the rags)
Trays
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Total
79,89
40,00
40,00
35,50
5,28
111,76
40,04
223,20
26,98
3,57
6,48
4,09
8,73
7,44
4,55
50,24
22,24
1,24
4,17
91,20
Useful life (years)
5
10
10
10
50
9
9
0,08
5
0,08
1
0,08
5
0,5
0,25
5
5
1
5
10
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
For 1 month
1,33
0,33
0,33
0,30
0,01
1,03
0,37
223,20
0,45
3,57
0,54
4,09
0,15
1,24
1,52
0,84
0,37
0,10
0,07
0,76
240,60
Indirect Labor
Indirect labor includes people that are not making fudge directly but are selling it or cleaning the factory. At the
early stages, we have decided that one cleaning and one selling person will be sufficient. Those people will be
working 6 days per week and 9 hours per day (54 hours per week). Their salary will be $ 3 per hour. Hence, the
costs of indirect labor per month will be as follows:
Indirect labor
Selling Person
Cleaning Person
Total
Hours per month
216,00
216,00
$
$
Rate
3,00
3,00
Salary per month
$
648,00
$
648,00
$
1 296,00
10
Utilities
Utility costs include gas, electricity and water. One of our team members was able to consult with her family in
order to gain insight into approximate cost of utilities for such small businesses as our own. The table draws
her conclusions. More detailed calculations of utilities costs can be found in the Sources section.
Utilities
Gas
Electricity
Water
Total Utilities
$
$
$
$
243,26
195,00
16,50
454,76
Other Overheads
Other overheads include possible contingencies that we might have overlooked. An example may be the
money we may need to pay to Bulgarian mafia or a bribe to a store inspector. We agreed that we will not pay
more than $ 100 per month.
Promotional Overhead
As for the promotional overhead costs, they firstly include money paid for online hosting of our website. We
decided that having it will help us to attract more customers, which will result in more sales. Secondly, we have
decided to print out flyers and give them away to people on the street in order to make them aware of our
product as well as location. We feel this should be used in the costing of the product, as these costs will be
indefinite in time.
Promotional OH
Per Month
Website hosting
$
3,33
Flyers x1000
$
333,33
$
336,67
Total Overhead and its allocation
After adding up the intermediary values, the total overhead cost appeared to be $ 2999.13. We have decided
to allocate this cost based on direct labor hours, as our business seems to be labor-intensive. During the month
our business should have 335 direct labor hours. So, the OH rate will be total cost divided by total direct labor
hours and will equal to $ 8.95. The table below illustrates:
Total OH per month
Total DL hours per month =
POHR =
$
2 999,13
335
8,95
11
Full Costing
Full costing involves calculation of the price per one slice of fudge. We have decided to produce fudge of seven
varieties so that we can please more customers. Those seven are: base, Oreo, nuts, chocolate-raisin, coconut,
chocolate-nut, and chocolate. Maximum amount of batches that we can produce in one month is 468 (that is
14040 slices) due to our hours of operation. However, selling this amount of slices per month is unrealistic.
That is why we plan to produce only 335 batches per month (10050 slices).
The next step is to decide on the number of each type of fudge that we will produce. Fortunately, one of our
team members has experience in selling fudge and knows which variety sells best. With his help we were able
to make ranking from best-seller to worst-seller. The computing routine is given in the table:
Flavor
Base
26
Oreo
56
Nuts
51
Chocolateraisin
26
Coconut
50
Chocolatenut
76
Chocolat
e
50
780
1 680
1 530
780
1 500
2 280
1 500
$228,6
5
$648,71
$518,58
$460,36
$477,21
$1 367,40
$830,91
$78,00
$168,00
$153,00
$78,00
$150,00
$228,00
$150,00
26
56
51
26
50
76
50
$232,7
7
$501,35
$456,58
$232,77
$447,63
$680,40
$447,63
$539,4
2
$1
318,06
$1
128,16
$771,13
$1
074,84
$2 275,80
$1
428,54
$0,69
$0,78
$0,74
$0,99
$0,72
$1,00
$0,95
Batches Produced
Slices Produced
DM
DL
DL hours
OH
Full Cost per month
Full Cost per unit
Total full cost per
month
$8
535,94
Currently, we do not have any competitors that would affect our pricing strategy. With that, after calculating
price per one unit of each flavor we have agreed that 11% profit margin will satisfy our profit desires without
damaging the price. Below are the prices of each type of fudge after adding the profit load (prices are in dollars
and levas – exchange rate fluctuations have virtually no effect):
11%
Profit load =
$0,77
$0,87
$0,82
$1,10
$0,80
$1,11
$1,06
1,15 лв.
1,31 лв.
1,23 лв.
1,65 лв.
1,19 лв.
1,66 лв.
1,59 лв.
Price (USD)
Price (BGN)
12
Break-even Analysis
Break-even analysis determines how many units a business needs to sell in order to cover all of the costs. At
this point, the profit is equal to zero. Break-even point (BEP) is calculated by dividing fixed costs by contribution
margin. Below is presented data (per month) necessary for calculating BEP of our products.
Per Unit
Base
Slices Sold
Oreo
Nuts
Chocolate-raisin Coconut
Chocolate-nut Chocolate
780
1 680
1 530
780
1 500
2 280
1 500
$0,77
$0,87
$0,82
$1,10
$0,80
$1,11
$1,06
Variable Cost
$ 0,39
$ 0,49
$ 0,44
$ 0,69
$ 0,42
$ 0,70
$ 0,65
Contribution Margin
$0,37
$0,38
$0,38
$0,41
$0,38
$0,41
$0,40
Fixed Costs
$0,30
$0,30
$0,30
$0,30
$0,30
$0,30
$0,30
Net Operating Income $ 0,12
$ 0,14
$ 0,13
$ 0,18
$ 0,13
$ 0,19
$ 0,18
Sales Revenue
Total fixed costs per month are provided additionally:
Fixed Costs
$233
$501
$457
$233
$448
$680
$448
Below is the calculated break-even point in units, found by dividing fixed cost of a relevant flavor by its
contribution margin.
Break-even analysis Base Oreo
Break-even (units)
622
Nuts
1 303 1 203
Chocolate-raisin Coconut Chocolate-nut Chocolate Total
572
1 187
1 667
1 110
7 654
From our analysis we conclude that our break-even points are favorable. We need to sell a little over half of the
budgeted units to cover our expenses. The rest sales will contribute directly to profit. Some additional
marketing research may aid in evaluating the findings.
After calculating break-even points we proceeded with finding margin of safety (MOS), which measures how
strong a shock a business can suffer in sales before it starts losing money. Computation of the BEP was a good
starting point. MOS is calculated by subtracting BOP (in units) from projected units sold. It determines how
much sales of a certain business can drop before losses occur. MOS can be measured in units, percentage or
sales value.
13
Below is information on our MOS1:
Margin of safety in percentage
30%
25%
20%
15%
Margin of safety in
percentage
10%
5%
0%
1
Margin of safety in dollar2 value and units is presented in the table:
Flavors
Slices Sold
Break-even (units)
Margin of safety (units)
Margin of safety (dollars)
Base
780
622
158
$ 122
Oreo
1 680
1 303
377
$ 328
Nuts
1 530
1 203
327
$ 268
Chocolate-raisin
780
572
208
$ 229
Coconut
1 500
1 187
313
$ 249
Chocolate-nut
2 280
1 667
613
$ 679
Chocola
te
1 500
1 110
390
$ 412
Our margin of safety is not very high, yet it is at a quite comfortable level for a startup of over 20%. We realize
that we need to sell relatively large amount of units to cover all of the costs and start making profit. We further
acknowledge the limits of our safety net. Nonetheless, the novelty of the product, as well as expertise and
enthusiasm of the team, seems to outweigh the risks just mentioned.
1
2
MOS in percentage is calculated by using this formula: (Predicted Volume of Sales – BEP)/Predicted Sales
MOS in units is calculated by using this formula: Predicted Volume of Sales – BEP
14
Budgets
Budget is an estimation of future expenses and incomes. It is very impractical and inefficient to start or lead
any business without budgets. They help managers of any company to plan future activities, order necessary
materials, hire certain number of workers and produce required quantity of goods. Furthermore, budget is a
useful tool for eliminating production wastes and maintaining required amounts of cash. This section will cover
all necessary budgets for our business. We will start with Sales Budget and will end with Cash Budget where all
of the cash expenditures and surpluses for a period will be presented. Budgeted Income Statements and
Balance Sheets will also be provided to ensure continuity in all calculations.
Sales budget shows all the money received from selling our fudge. We have decided to produce 30 150 slices of
fudge for one quarter (three times the monthly amount). In order to find our profit from sales we have to first
multiply our monthly costs by three to get all costs for a quarter. Afterwards, we find the total revenues from
sales per quarter by multiplying all costs by 111% (one + profit load of eleven percent). For future references,
an average price is determined by dividing the sales by the units sold. The Sales Budget is thus as follows:
Sales Budget:
Q1 2015
Q2 2015
Q3 2015
Q4 2015
2015
Units sold
30 150
30 150
30 150
30 150
120 600
Average Selling Price
$ 0,94
$ 0,94
$ 0,94
$ 0,94
$ 0,94
Total Sales
$ 28 425
$ 28 425
$ 28 425
$ 28 425
$ 113 699
For future references, an average price for our production was calculated from dividing total sales by units sold
(Total Sales/Units Sold). We assume that total cash collection from sales will be equal to the total sales because
all transactions are in cash (we do not make sales on credit).
Next budget that we calculate is a production budget. This budget illustrates how many slices of fudge we need
to produce for each quarter. Also, we have decided that it will be a drawback if we do not keep some slices for
a new quarter as inventory. Since fudge is not a long-lasting product and it has to be consumed fresh; we need
to keep our inventory rates low. Inventory rate of 5% seemed appropriate. With that, the production budget
with inventory is presented:
Production Budget:
Q1 2015
Q2 2015
Q3 2015
Q4 2015
2015
Units sold
30 150
30 150
30 150
30 150
120 600
Beginning Inventory
1 508
1 508
1 508
3
Desired Ending Inventory
1 508
1 508
1 508
1 508
1 508
Required production
31 658
30 150
30 150
30 150
122 108
Required production was found by adding units sold to desired ending and then subtracting beginning
inventory (Req. prod. = units sold + desired ending inventory – beginning inventory).
Calculation of production budget illustrates how many extra units we need to produce for inventory and allows
us to proceed with computation of Direct Materials, Direct Labor, and Overhead budgets.
Direct Materials budget illustrates how much cash we will need to spend in each quarter for DM of every
flavor. One can see from the production budget that in the first quarter of 2015 we need to produce a little bit
3
Desired Ending Inventory was found by multiplying next quarter’s production by five percent. We assume that next
quarter’s production will be the same throughout the year.
15
more units than for the rest of the year due to the building of inventory. In order to find DM for every flavor in
the first quarter we need to divide total required production (31658) by the total units produced per one
month (10050) and multiply it by the relevant DM cost (inflating monthly numbers keeping proportions of
flavors the same). For the rest of the quarters we can see that desired ending inventory and opening
inventories are cancelling each other out and we just need to produce regular quarterly volume of units
(volume for one month multiplied by three). The calculation of DM is much easier now since we can just
multiply monthly cost of DM by three. As sugar has long shelf life, we hold an inventory of DM at 20%. Below is
DM budget for the year of 2015:
DM budget:
DM for base
DM for Oreo
DM for nuts
DM for chocolate-raisin
DM for coconut
DM for chocolate-nut
DM for chocolate
DM beginning inventory
DM desired ending invenotry
Total DM
Q1 2015
$
720
$ 2 043
$ 1 634
$ 1 450
$ 1 503
$ 4 307
$ 2 617
$
$ 2 719
$ 16 994
Q2 2015
$
686
$ 1 946
$ 1 556
$ 1 381
$ 1 432
$ 4 102
$ 2 493
$ 2 719
$ 2 719
$ 13 595
Q3 2015
$
686
$ 1 946
$ 1 556
$ 1 381
$ 1 432
$ 4 102
$ 2 493
$ 2 719
$ 2 719
$ 13 595
Q4 2015
$
686
$ 1 946
$ 1 556
$ 1 381
$ 1 432
$ 4 102
$ 2 493
$ 2 719
$ 2 719
$ 13 595
$
$
$
$
$
$
$
$
$
$
2015
2 778
7 882
6 301
5 593
5 798
16 614
10 096
2 719
57 781
We assume that we will pay 80% of the money to our suppliers in the first quarter and the rest will be paid in
the next quarter. Cash disbursements for DM are illustrated in the table below:
Cash Disbursements for DM:
Q1 2015
Q2 2015
Q3 2015
Q4 2015
2015
DM purchase of Q1
$ 13 595
$ 3 399
$ 16 994
DM purchase of Q2
$ 10 876
$ 2 719
$ 13 595
DM purchase of Q3
$ 10 876
$ 2 719
$ 13 595
DM purchase of Q4
$ 10 876
$ 10 876
Total cash
$ 13 595
$ 14 275
$ 13 595
$ 13 595
$ 55 061
DM purchases for each quarter were found by multiplying total DM for that quarter by 80% and the rest 20%
were paid in the next quarter. There will also be an account payable for the next year in the amount of $ 2719
(calculated by multiplying fourth quarter DM by 20%).
DL is calculated by the same principle as the DM. We have to divide required production for the quarter by
total units produced in one month and multiple the results by relevant DL per month (Total DL Q1/Total units
produced in one month x relevant monthly DL). For the rest of the quarters we can just multiply monthly DL by
three, since we produce regular monthly amount of 10050 units (inventory is held constant). A calculation of
the DL is presented in the table below.
16
DL budget:
DL for base
DL for Oreo
DL for nuts
DL for chocolate-raisin
DL for coconut
DL for chocolate-nut
DL for chocolate
Total DL
Q1 2015
$
246
$
529
$
482
$
246
$
473
$
718
$
473
$ 3 166
Q2 2015
$
234
$
504
$
459
$
234
$
450
$
684
$
450
$ 3 015
Q3 2015
$
234
$
504
$
459
$
234
$
450
$
684
$
450
$ 3 015
Q4 2015
$
234
$
504
$
459
$
234
$
450
$
684
$
450
$ 3 015
$
$
$
$
$
$
$
$
2015
948
2 041
1 859
948
1 823
2 770
1 823
12 211
Money for the DL is paid in cash in the same month. Hence, here are cash disbursements for DL for the 2015:
DL Cash Disbursements:
Total
Q1 2015
$ 3 166
Q2 2015
$ 3 015
Q3 2015
$ 3 015
Q4 2015
$ 3 015
2015
$ 12 211
Overhead Budget consists of the OH costs distributed for each flavor. The calculations are done using the same
approach as for DM and DL (Total Units Q1/Total monthly units x relevant OH cost per month). For the rest of
the quarters we just multiply monthly cost of a certain OH cost by three. Table with the results is illustrated
here:
OH Budget:
Depreciation
Rent
Indirect Materials
Indirect Labor
Utilities
Promotional OH
Other OH
Total OH
Q1 2015
$
159
$ 1 640
$
758
$ 4 082
$ 1 432
$ 1 061
$
315
$ 9 447
Q2 2015
$
151
$ 1 562
$
722
$ 3 888
$ 1 364
$ 1 010
$
300
$ 8 997
Q3 2015
$
151
$ 1 562
$
722
$ 3 888
$ 1 364
$ 1 010
$
300
$ 8 997
Q4 2015
$
151
$ 1 562
$
722
$ 3 888
$ 1 364
$ 1 010
$
300
$ 8 997
$
$
$
$
$
$
$
$
2015
613
6 326
2 923
15 746
5 525
4 091
1 215
36 439
All of the costs, except depreciation, are in cash. Therefore, in order to conduct cash budget we need to know
amount of cash spent on overheads. That is why we have to subtract depreciation from the total OH cost.
These calculations can be seen here:
Cash Disbursements for OH:
Total
Depreciation
Total cash
2015
$ 36 439
$
613
$ 35 827
2016
$
36 831
$
1 004
$
35 827
$
$
$
2017
36 831
1 004
35 827
$
$
$
2018
36 831
1 004
35 827
2019
$ 40 121
$
1 004
$ 39 117
After calculating all disbursements of cash we can proceed to computation of the almighty cash budget. In this
budget we subtract all of the cash expenses (DM, DL, and OH) from cash received during sales. Here we also
included selling and administrative expense which included our salary ($ 250 each person for the whole
quarter). That amount appeared sufficient since we will also get paid from working in the factory at $ 3 an
hour. Subtraction of these disbursements from cash receipts shows how much money we made only from
doing sales (cash from operations). After calculating cash from operations we have to deduct expenses on
17
equipment that we have purchased in order to get our factory going. Equipment expense includes money
spend on two stows, two marble tables, stove pot, showcase, register, and thermometer. Then we move on to
financing part of the cash budget. There, we show funding received from outside sources (for example: loan
from the bank, borrowings from a friend and so on). Fortunately, Mr. Berisha, who believes in our project and
admits our motivation, will be generous enough to borrow us $ 10 000 dollars for the period of one year with
the interest of 10%. Interest will be paid at the end of each quarter and full amount will be repaid at the end of
the year. To calculate total surplus and deficiency of cash for the period we are using this formula: Cash from
operations – Equipment + Principal – Interest – Repayments. Then, we move to Ending Cash that is calculated
by adding total cash surplus and beginning cash balance. For the first quarter our beginning cash balance is
zero since we are just starting our factory and do not have cash. In order to better understand our cash budget
and visualize our calculations, a table is presented:
Cash Budget:
Q1 2015
Q2 2015
Q3 2015
Q4 2015
2015
Cash Receipts
$ 28 425
$ 28 425
$ 28 425
$ 28 425
$ 113 699
DM
$ 13 595
$ 14 275
$ 13 595
$ 13 595
$
55 061
DL
$
3 166
$
3 015
$
3 015
$
3 015
$
12 211
OH
$
9 288
$
8 846
$
8 846
$
8 846
$
35 827
S&A
$
1 000
$
1 000
$
1 000
$
1 000
$
4 000
Cash from operations
$
1 375
$
1 288
$
1 968
$
1 968
$
6 600
Equipment
$
3 868
$
-
$
-
$
-
$
3 868
Principal
$ 10 000
$
-
$
-
$
-
$
10 000
Interest
$
250
$
250
$
250
$
250
$
1 000
Repayment
$
-
$
-
$
-
$ 10 000
$
10 000
$
7 257
$
1 038
$
1 718
$ -8 282
$
1 732
0
$
7 257
$
8 296
$ 10 014
$
-
7 257
$
8 296
$ 10 014
$
$
1 732
Cash Disbursements
Financing
Total cash surplus/deficiency
Beginning Cash
Ending Cash
$
1 732
Our cash surplus is positive for the first three quarters but is negative in the fourth quarter since we will have
to repay our loan. Even though we have to pay back a large sum of money we will manage to end 2015 with a
positive cash balance.
Reflecting on initial statements, budgets for our production give us a good estimation of the future activities.
They enable us to eliminate possible waste. For example, we will not buy too many DM and will not hire too
many workers. Also, with the budgets’ help we have a good estimation of our expenses, which prevents us
from running out of cash and plan our activities accordingly. Furthermore, making budgets can show whether a
business should be opened at all. In our case budgets draw an optimistic picture.
18
Five-year Budget
Besides calculating a detailed one-year budget for 2015, we also determined an estimate budgets for the next
four years. We are sure that our production volume will change in the future because of reasons we present
below.
First, we did the sales budget. In 2016 we will produce 60 300 units more than in 2015. At the beginning of
2016 we will hire one more worker and purchase some new equipment for a total of $ 2860 (two stoves and
one marble table). Thus, we calculated that our new units sold would be 180 900. We multiplied 120 600 (units
sold in 2015) by 3/2 (on average one worker makes 0.5x slices per year, where x is number of slices, then three
workers will do 1.5x or 3/2x). Our average selling price ($ 0.94) remains the same till the 2017. In this way, we
see that our total sales for 2016 also increased by 1.5. At the beginning of the 2017 our much-esteemed
colleague Mr. Eremin will move to Uruguay. He will go to a Buddhist monastery high in the mountains to find
his inner self (or he will go there to find spiritual and physical rest due to the hardships at work). In his absence,
we will substitute him with another worker who will not perform his job as good as Mr. Eremin. Consequently,
our units sold will decrease and our sales will fall down by 50%. Price remains the same. But throughout this
year the new worker will gain more experience and in 2018 our sales will return to 2015 level. However, the
selling price will increase due to inflation. During 2019 our business will suffer from the decline in sales due to
increase in price in previous year.
In the table below are presented the projected sales volume for five years:
Sales Budget:
Units sold
Average Selling Price
Total Sales
2015
120 600
$ 0,94
$ 113 699
2016
180 900
$ 0,94
$ 170 548
2017
90 450
$ 0,94
$ 85 274
2018
120 600
$ 1,00
$ 120 600
2019
1 08 540
$ 1,00
$ 108 540
Total cash collection from sales again will be equal to the total sales because all transactions are in cash.
Next budget that we have calculated is a production budget. Our inventory rate will remain the same
throughout all the years (5%). The required production will only change due to increase/decrease in units sold.
Predicted production budget is represented below (all numbers are in units):
Production Budget:
Units sold
Beginning Inventory
Desired Ending Inventory
Required production
2015
120 600
1 508
122 108
2016
180 900
1 508
1 508
180 900
2017
90 450
1 508
1 508
90 450
2018
120 600
1 508
1 508
120 600
2019
108 540
1 508
1 508
108 540
Our desired ending inventory will remain at minimum of 1508 slices throughout the years because we want to
sell only fresh fudge.
19
Computation of the sales budget illustrated how many units of production we would need and allowed us to
construct a Direct Material Budget. At the beginning of 2015 we will not have any beginning inventory but we
will have a closing inventory which will become beginning for the 2016. This formula will be applied to every
next year – the ending inventory of previous year is beginning inventory for the next year. In 2016 our direct
materials for fudge will rise up by 1.5 due to increase in the production of units and in sales. So we multiply all
the numbers from 2015 by 1.5. In 2017 we will need less DM because the production of fudge will decrease by
50% and thus we multiply numbers from a previous year (2016) by 0.5. DM budget for 2018 will be the same as
for the year 2015 because sales will return to 2015 level. Nevertheless, during 2019 our DM budget will face
some decreases. Due to inflation our sales will drop by 10% but all other costs (except depreciation and indirect
materials) will increase by 10%. It also applies to direct materials. So we multiplied DM for 2018 by 0.9
(decrease in sales) and by 1.1 (increase in costs), and we got our direct materials for 2019.
DM budget for five years is illustrated below:
DM budget:
DM for base
DM for Oreo
DM for nuts
DM for chocolate-raisin
DM for coconut
DM for chocolate-nut
DM for chocolate
DM beginning inventory
DM desired ending invenotry
Total DM
2015
$ 2 778
$ 7 882
$ 6 301
$ 5 593
$ 5 798
$ 16 614
$ 10 096
$ $ 3 463
$ 57 781
2016
$ 4 167
$ 11 823
$ 9 451
$ 8 390
$ 8 697
$ 24 921
$ 15 143
$ 3 463
$ 21 040
$ 100 169
2017
$ 2 084
$ 5 911
$ 4 726
$ 4 195
$ 4 349
$ 12 460
$ 7 572
$ 21 040
$ 20 000
$ 40 256
2018
$ 2 778
$ 7 882
$ 6 301
$ 5 593
$ 5 798
$ 16 614
$ 10 096
$ 20 000
$ 20 000
$ 55 061
2019
$ 2 750
$ 7 803
$ 6 238
$ 5 537
$ 5 740
$ 16 448
$ 9 995
$ 20 000
$ 10 902
$ 45 413
In order to find cash disbursements for DM in 2016, we divided total cash disbursements for 2015 ($ 55 061) by
total DM 2015 ($57 781). This gave us a proportion between actual cash payments made to suppliers and the
total cost of DM (0.953). Then we multiplied this number by total DM for 2016. And we got cash disbursements
for the 2016 ($ 95 455).
Same principle of calculation applies to the next years.
Cash Disbursements for DM:
Total cash
2015
$ 55 061
2016
$ 95 455
2017
$ 38 362
2018
$ 52 470
2019
$ 43 276
After DM we moved to the Direct Labor Budget. Our direct labor is calculated using the same principle as for
the DM budget. In 2016 our direct labor will rise up by 1.5 due to the new hired worker. So we multiplied all
the numbers from 2015 by 1.5. In 2017 we will have less DL because Mr. Eremin will go to Uruguay, his new
substitute will be less experienced, and thus the production of fudge will decrease by 50%. So we multiplied
numbers from a previous year (2016) by 0.5. DL budget for 2018 will be the same as for 2015 because the
substitute will gain experience and sales will return to 2015 level. In 2019 our company will suffer from
consequences of 2018 inflation. After our sales will drop by 10% and all other costs will increase by 10%, our DL
20
budget will also decrease and our workers will be paid less. So we multiplied DL for 2018 by 0.9 (decrease in
sales) and by 1.1 (increase in costs), and we got our DL for 2019.
DL budget:
DL for base
DL for Oreo
DL for nuts
DL for chocolate-raisin
DL for coconut
DL for chocolate-nut
DL for chocolate
Total DL
2015
$ 948
$ 2 041
$ 1 859
$ 948
$ 1 823
$ 2 770
$ 1 823
$ 12 211
2016
$ 1 422
$ 3 062
$ 2 788
$ 1 422
$ 2 734
$ 4 155
$ 2 734
$ 18 316
2017
$ 711
$ 1 531
$ 1 394
$ 711
$ 1 367
$ 2 078
$ 1 367
$ 9 158
2018
$ 948
$ 2 041
$ 1 859
$ 948
$ 1 823
$ 2 770
$ 1 823
$ 12 211
2019
$ 938
$ 2 021
$ 1 840
$ 938
$ 1 804
$ 2 742
$ 1 804
$ 12 089
Total cash disbursements for direct labor will be equal to the total DL because we pay our employees directly in
cash.
Then we did an Overhead Budget. At the beginning of 2016 we will buy some new equipment such as two
stoves and one marble table for a total of $ 2860 which will lead to increase in depreciation. In order to find
this increase for 2016 we took depreciation of 2015 added depreciation of the stove per one year added
depreciation of the marble table per one year divided by two (we will buy one table, depreciation is for two
tables). All other overheads (rent, indirect materials, indirect labor, utilities, promotional OH, other OH) will
remain on the 2015 level. OH budget for years 2017-2018 will stay on 2016 level because we will not buy any
additional equipment, and rent and other overheads will also stay the same. However, in 2019 our factory will
suffer from the consequences of 2018 inflation. All our costs except of depreciation and indirect materials will
increase by 10%. So, we multiplied rent, indirect labor, utilities, promotional OH, and other OH by 1.1 to
indicate the ten percent increase.
All calculations are presented in the table below:
OH Budget:
Depreciation
Rent
Indirect Materials
Indirect Labor
Utilities
Promotional OH
Other OH
Total OH
2015
$ 613
$ 6 326
$ 2 923
$ 15 746
$ 5 525
$ 4 091
$ 1 215
$ 36 439
2016
$ 1 004
$ 6 326
$ 2 923
$ 15 746
$ 5 525
$ 4 091
$ 1 215
$ 36 831
2017
$ 1 004
$ 6 326
$ 2 923
$ 15 746
$ 5 525
$ 4 091
$ 1 215
$ 36 831
2018
$ 1 004
$ 6 326
$ 2 923
$ 15 746
$ 5 525
$ 4 091
$ 1 215
$ 36 831
2019
$ 1 004
$ 6 959
$ 2 923
$ 17 321
$ 6 078
$ 4 500
$ 1 337
$ 40 121
21
Cash disbursements for OH do not include depreciation because it does not require current outlay of cash.
Thus, we deducted depreciation cost from the total OH and we got total cash disbursements for OH.
Cash Disbursements for OH:
Total
Depreciation
Total cash
2015
$ 36 439
$ 613
$ 35 827
2016
$ 36 831
$ 1 004
$ 35 827
2017
$ 36 831
$ 1 004
$ 35 827
2018
$ 36 831
$ 1 004
$ 35 827
2019
$ 40 121
$ 1 004
$ 39 117
Our next prepared budget is Cash Budget. Here we included cash receipts, all cash disbursements from DM, DL,
OH, and Selling and Administrative expenses. We deducted all cash disbursements from cash receipts and got
cash from operations. Selling and administrative expenses for 2015 are equal to $ 4 000 but in 2016 we will hire
one more worker and we will pay $ 2 000 more. From 2016 till 2019 selling and administrative expense will
remain the same ($ 6 000). In order to find whether we will have a surplus or deficit in cash, we have to deduct
other cash expenses from cash received during operations. At the beginning of 2016 we will purchase some
equipment of total $ 2 860, and we will not have any accounts payable and financing. In years 2017 and 2018
we will have to pay our suppliers $ 7 433 and $ 1 894 respectively. In 2019 we will purchase machine for $ 2
860 and we will also have A/P for DM of $ 2 591. We do not have beginning cash in 2015 because we will just
start our business. So ending cash will be equal to total cash surplus from 2015. Beginning cash of 2016 is the
ending cash of 2015 (this rule applies to all other years – beginning cash of present year is the ending cash of
the previous year). The ending cash for 2016 was found by adding beginning cash to the total
surplus/deficiency (this formula applies to other years too). We can conclude that cash balance remains
positive throughout five years.
The numbers for cash budget are illustrated below:
Cash Budget:
Cash Receipts
Cash Disbursements
DM
DL
OH
S&A
Cash from operations
Equipment
Settlement of payables
Financing
Principal
Interest
Repayment
Total cash surplus/deficiency
Beginning Cash
Ending Cash
2015
$ 113 699
2016
$ 170 548
2017
$ 85 274
2018
$ 120 600
2019
$ 108 540
$ 55 061
$ 12 211
$ 35 827
$ 4 000
$ 6 600
$ 3 868
$ -
$ 95 455
$ 18 316
$ 35 827
$ 6 000
$ 14 950
$ 2 860
$ -
$ 38 362
$ 9 158
$ 35 827
$ 6 000
$ -4 073
$
$ 7 433
$ 52 470
$ 12 211
$ 35 827
$ 6 000
$ 14 092
$
$ 1 894
$ 43 276
$ 12 089
$ 39 117
$ 6 000
$ 8 058
$ 2 860
$ 2 591
$ 10 000
$ 1 000
$ 10 000
$ 1 732
$ $ 1 732
$ $ $ $ 12 090
$ 1 732
$ 13 822
$
$
$
$ -11 506
$ 13 822
$ 2 316
$
$
$
$ 12 198
$ 2 316
$ 14 514
$
$
$
$ 2 607
$ 14 514
$ 17 121
22
So, then we moved on to the income statement. It consists of three parts that we had to find: gross profit, net
operating income and net income. In order to find gross profit we subtracted cost of sales from sales. Cost of
sales is a real cost of units sold and it can be found by summarizing all DM, DL, and OH costs and dividing them
by the required production of units.
Cost per Unit
$ 0,84
$ 0,76
$ 0,97
$ 0,86
$ 0,98
Sales were taken from the sales budget and were deducted from cost of sales. Only in 2017 we will have a
negative gross profit because our sales will drop by 50%. To find net operating income we have to subtract
expenses from gross profit. In our case we subtracted selling and administrative expenses. We subtracted
interest expense (to be paid in 2015) from net operating income and get net income. For years 2016-2019 net
income will be equal to net operating income. Due to the decrease in sales in 2017 and consequences of 2018
inflation in 2019 we will have negative net incomes. But it still can be seen that our business is profitable.
Income Statement
Sales
Cost of Sales:
Gross Profit
Expenses
Selling and Administrative
Net Operating Income
Interest Expense
Net Income
2015
$ 113 699
$ 102 431
$ 11 267
2016
$ 170 548
$ 137 739
$ 32 809
2017
$ 85 274
$ 87 285
$ -2 011
2018
$ 120 600
$ 104 103
$ 16 497
2019
$ 108 540
$ 106 721
$ 1 819
$ 4 000
$ 7 267
$ 1 000
$ 6 267
$ 6 000
$ 26 809
$ $ 26 809
$ 6 000
$ -8 011
$
$ -8 011
$ 6 000
$ 10 497
$
$ 10 497
$ 6 000
$ -4 181
$
$ -4 181
And the last financial report that we have prepared is balance sheet. Balance sheet includes assets, liabilities
and equity. Total assets should be equal to the sum of liabilities and equity. Assets include fixed assets, cash
and inventory. In order to find fixed assets we subtracted depreciation of present year from fixed assets of the
previous year and added purchased equipment (if we had any). In years 2016 and 2019 we will purchase
equipment so we added it to fixed assets. Cash was taken from the cash budget. Inventory was found by
multiplying desired ending inventory for production budget (present year) by cost per unit (year 2015 –
constant) and adding DM desired ending inventory (present year). These formulas were applied to all next
years. By adding fixed assets, cash and inventory we got total assets per year. Liabilities include loan and
accounts payable. We will not take any loans during these five years, so we included here only accounts
payable. Equity includes retained earnings and net operating income. Retained earnings for 2015 are equal to
zero because we will only start our business. For years 2016-2019 retained earnings will be equal to sum of
retained earnings and net operating income from previous year. Net operating income for each year is taken
from the Income Statement.
23
Balance Sheet at end of
Assets
Fixed Assets
Cash
Inventory
Total assets
Equity & Liabilities
Liabilities
Loan
Accounts payable
Equity
Retained Earnings
Net Operating Income
Total Liabilities & Equities
2015
2016
2017
2018
2019
$ 3 255
$ 1 732
$ 3 999
$ 8 987
$ 5 111
$ 13 822
$ 22 311
$ 83,449
$ 4 107
$ 2 316
$ 21 271
$ 71,307
$ 3 103
$ 14 514
$ 21 271
$ 99,866
$ 4 959
$ 17 121
$ 12 173
$ 108,052
$ $ 2 719
$ $ 7 433
$ $ 1 894
$ $ 2 591
$ $ 2 137
0
$ 6 267
$ 8 987
$ 6 267
$ 26 809
$ 83,449
$ 33 076
$ -8 011
$ 71,307
$ 25 065
$ 10 497
$ 99,866
$ 35 562
$ -4 181
$ 108,052
Our balance sheet shows investors our financial position throughout the years, and it also displays what we
own and owe.
24
Income Statement and Financial Position
Income statement is one of the most important financial statements which presents the costs and revenues of
a business for a particular period. It consists of two parts. First part shows the profit from operations (regular
day to day activities). The second part subtracts all of the expenses that are not related to typical activities and
presents net profit. Below you are see income statement for our factory:
Income Statement
Sales
Cost of Sales:
Gross Profit
Expenses:
Selling and Administrative
Net Operating Income
Interest Expense
Net Income
Q1 2015
$ 28 425
$ 25 608
$ 2 817
Q2 2015
$ 28 425
$ 25 608
$ 2 817
Q3 2015
$ 28 425
$ 25 608
$ 2 817
Q4 2015
$ 28 425
$ 25 608
$ 2 817
2015
$ 113 699
$ 102 431
$ 11 267
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1 000
1 817
250
1 567
1 000
1 817
250
1 567
1 000
1 817
250
1 567
1 000
1 817
250
1 567
4 000
7 267
1 000
6 267
Balance Sheet, on the other hand, shows a financial performance of a business at a given date. It consists of
assets, liabilities and owner’s equity. The formula for the balance sheet is: Assets = Liability + Owner’s equity.
Our assets consist of equipment cash and inventory. Fixed assets include our equipment minus depreciation.
Cash is the ending cash amount that we get in our Income Statement. Inventory consists of DM and slices of
fudge. Liabilities are composed of everything we owe. Since we have taken a loan in the first quarter and have
to pay it back it is one of our debts. The other liability is the accounts payable for the DM since we do not pay
the full amount of to our suppliers in the same quarter. Equity part consists of retained earnings, sum of
previous quarter net income and current net income. Net income is a straightforward number taken from our
income statement.
For better visualization take a look at our balance sheet below.
Balance Sheet at end of
Assets
Fixed Assets
Cash
Inventory
Total assets
Equity & Liabilities
Liabilities
Loan
Accounts payable
Equity
Retained Earnings
Net Operating Income
Total Liabilities & Equities
Q1 2015
Q2 2015
Q3 2015
Q4 2015
2015
$ 3 709
$ 7 257
$ 3 999
$ 14 966
$ 3 558
$ 8 296
$ 3 999
$ 15 853
$ 3 406
$ 10 014
$ 3 999
$ 17 420
$
$
$
$
3 255
1 732
3 999
8 987
$
$
$
$
3 255
1 732
3 999
8 987
$ 10 000
$ 3 399
$ 10 000
$ 2 719
$ 10 000
$ 2 719
$
$
2 719
$
$
2 719
0 $ 1 567
$ 1 567
$ 1 567
$ 14 966
$ 15 853
$ 3 134
$ 1 567
$ 17 420
$
$
$
4 701
1 567
8 987
$
$
$
4 701
1 567
8 987
25
What-if Analysis
The What-if analysis helps us create various scenarios that might occur in our project and estimate how likely it
is for those scenarios to come true. By seeing how numbers change in certain situation, we can determine the
risk of our investment. For our fudge business, we decided to change different parameters by 1%, -1% and 5%.
Our final goal was to analyze the effect that they will have on the Net Income in 2015, the NPV and on the
Average Price. From the what-if analysis we conclude that our business is flexible enough, therefore it is worth
the investment.
The tables below illustrate the changes that occurred in the different scenarios (Net Income in 2015, NPV, and
Average Price):
Effect on Net Income in 2015
Parameter Changed:
Base =
1%
Profit Margin
$
-1%
6,267
5%
16.36%
-16.34%
81.73%
Sugar Price
0.49%
-0.48%
2.46%
DL Rate
0.85%
-0.83%
4.23%
Total OH
0.64%
-0.62%
3.16%
Sales on Each Flavor
1.18%
-1.16%
5.84%
Effect on NPV
Parameter Changed:
Base =
1%
$
-1%
110.54
5%
Profit Margin
2140%
-2140%
10698%
Sugar Price
-187%
187%
-933%
DL Rate
762%
-762%
3809%
Total OH
834%
-834%
4172%
Sales on Each Flavor
485%
-485%
2427%
Effect on Average Price
Parameter Changed:
Base =
1%
$
-1%
0.93
5%
DM
0.53%
-0.53%
2.62%
DL
0.47%
-0.47%
2.37%
OH
0.35%
-0.35%
1.77%
26
Flexible Budget
Flexible budget helps to make an assumption of our production, since flex budget adjusts to the changes in the
volume of the activity. We performed a flexible budget for the first quartet of the year 2015. At first we
assumed that 30, 150 units will be sold, however in reality we sold 30, 000 slices of fudge. The calculations
show that the Net Operating Income in reality is $637 less and the OH is 5% higher. However, over all the
changes are not crucial and the variances of the Sales Price, Direct Material usage, Direct Labor efficiency and
price are all favorable.
Below are presented the values of the predicted budget:
Budget for Q1
Q1 2015
Quantities
Units
Avg Price Per Unit
Sales
$
28,425
30,150
slices
$
0.94
DM
$
12,995
10,974
kg
$
1.18
DL
$
3,166
1,055
hours
$
3.00
Fixed OH
$
9,447
Net Operating Income
$
2,817
The second table illustrates the actual budget and the changes reflected in the flexible budget:
Units
Type
30,150
Budget
30,000
Flex
30,000
Actual
Flex
Actual
Quantity
Quantity
Sales
$ 28,425
$ 28,283
$ 29,000
DM
$ 12,995
$ 12,930
$ 14,000
10,919
9,000
DL
$ 3,166
$ 3,150
$ 2,900
1,050
1,000
Fixed OH
Net Operating
Income
$ 9,447
$ 9,447
$ 9,920
$ 2,817
$ 2,756
$ 2,180
We calculate the values of the parameters in the flexible budget by using the produced units of the actual
budget and the values of the predicted budget (presented in the first table). Since the Overhead is fixed, we get
the same value as the one in the predicted one.
27
NPV and IRR
It is challenging to determine the value of a project since there are different ways to calculate the value of the
future cash flows. The Net Present Value (NPV) is used to analyze the profitability of an investment of a
project, by presenting the differences between the present value of cash inflows and the present value of cash
outflows. The Required Rate of Return (RRR), which is the minimum annual percentage that should be earned
by an investment, assigned to the Fudge Factory is 20%. Based on this rate we get NPV equal to $110.54. Since
the value is higher than zero, it means that the investment would add value to the factory and our project
might be acceptable.
The Internal Rate of Return (IRR) reflects the growth of profit that certain project is expected to generate and
it is based on the cash flows of the project trough out some period of time (years). Even though the actual rate
of return might differ, the higher the IRR is, the more desirable a project gets. Our business has IRR which
equals to 20.50%, based on the cash flows of the five-year budget that we calculated. The IRR that we generate
is promising for a profitable business.
The Payback Period (PBP) of a business defines the length of time that is required to recover your investment.
It is important variable from which you can decide whether to undertake the project. If the period is short, the
project has more chances to be taken by the investors. PBP is based on the cash flow and the cumulative cash
flow in a certain timeline. For the fudge factory we calculate that we are going to return the invested money
for 1 year and 8.21 months. Therefore, we can conclude that this period is short, which flatters our business.
In the tables below are illustrated the mentioned values for NPV, IRR, and PBP:
Evaluation of Investment:
Timeline
Cash Flow
Cumulative CF
RRR
NPV
IRR
PBP
0
$ 10,000
1
$ 1,732
$ -8,268
20%
$110.54
20.50%
1
year
2
$ 12,090
$ 13,822
3
$ -11,506
$ 584
8.21
4
$ 12,198
$ 692
5
$ 2,607
$ 14,805
months
28
Sources
Items needed
Required Machinery
Stove x2
$2,820.00
http://www.concessionstands.com/CANDY-APPLE-STOVE-LP-GAS-FIREDPROPANE
Marble Tables x2
$78.52 http://olx.bg/masivni-mramorni-masi---tsenata-e-za-komplekta---holna-iliholova-masa-i58477118
Stove Pot (for fudge) x2 $138.20
http://chefs-heaven.com/1/37/1011.html
Showcase x2 $654.35
http://pleven.all.biz/hladilni-vitrini-g156829#.VEI6lfmsV1o
Register
$130.22
http://kasovaparat.com/promo-paket-kasov-aparat-sejif-za-pari-1-128.html
Thermometer $46.48 http://chefs-heaven.com/1/11/3031.html
Required items: Price (in dollars)
Big Wooden Spatula x3 $79.89 http://www.legendcookshop.co.uk/giant-wooden-spoon-20375-0.html
Knife x5
$60.00 http://chefs-heaven.com/0/4/288.html
Edger x5
$12.00 http://chefs-heaven.com/1/8/806.html
Loafer x5
$35.50 http://chefs-heaven.com/1/15/3547.html
Bar Sets x3
$5.28 http://www.metal-m.bg/productdetails.aspx?id=9
Pedals x3
$111.76http://chefs-heaven.com/0/15/3221.html
Scoop x4
$40.04 http://chefs-heaven.com/1/8/3580.html
Wax Paper
$0.18 https://naborsata.com/product/6183/Vosachni_hartii_A4__10_lista_v_paket.html
Thermal Gloves x2
$26.98 http://chefs-heaven.com/1/15/109.html
Sponges (10 per package)
(5 packages) $3.57
http://konsumativite.com/%D1%83%D1%80%D0%B5%D0%B4%D0%B8-%D0%B8%D0%BF%D0%BE%D1%81%D0%BE%D0%B1%D0%B8%D1%8F-%D0%B7%D0%B0%D0%BF%D0%BE%D1%87%D0%B8%D1%81%D1%82%D0%B2%D0%B0%D0%BD%D0%B5/domakinska-guba-zapochistvane-na-sudove
Gloves (10) $6.48
http://konsumativite.com/%D1%83%D1%80%D0%B5%D0%B4%D0%B8-%D0%B8%D0%BF%D0%BE%D1%81%D0%BE%D0%B1%D0%B8%D1%8F-%D0%B7%D0%B0%D0%BF%D0%BE%D1%87%D0%B8%D1%81%D1%82%D0%B2%D0%B0%D0%BD%D0%B5/domakinski-lateksovirukavici-za-pochistvane
Scrubbles
(6 per package)
(5 packages) $4.09
http://konsumativite.com/%D1%83%D1%80%D0%B5%D0%B4%D0%B8-%D0%B8%D0%BF%D0%BE%D1%81%D0%BE%D0%B1%D0%B8%D1%8F-%D0%B7%D0%B0%D0%BF%D0%BE%D1%87%D0%B8%D1%81%D1%82%D0%B2%D0%B0%D0%BD%D0%B5/nerujdaema-tel-zasudove
Strainer x2
(2) $8.73
http://www.pazaruvai-lesno.bg/view_product.php?pid=84840
Towels
$1.24
http://havliensviat.com/index.php?route=product/category&path=37_55
Rags
(5) $4.55
http://konsumativite.com/%D1%83%D1%80%D0%B5%D0%B4%D0%B8%D0%B8-%D0%BF%D0%BE%D1%81%D0%BE%D0%B1%D0%B8%D1%8F-%D0%B7%D0%B0%D0%BF%D0%BE%D1%87%D0%B8%D1%81%D1%82%D0%B2%D0%B0%D0%BD%D0%B5/barsalka-parcal-zapochistvane-na-pod-vaje-220gr
29
Aprons
$12.56 http://chefs-heaven.com/0/50/1580.html
Hats
$5.56 http://shapki.bg/shapki-s-kozirka/85/
Mop handle
(2) $1.24
http://konsumativite.com/%D1%83%D1%80%D0%B5%D0%B4%D0%B8%D0%B8-%D0%BF%D0%BE%D1%81%D0%BE%D0%B1%D0%B8%D1%8F-%D0%B7%D0%B0%D0%BF%D0%BE%D1%87%D0%B8%D1%81%D1%82%D0%B2%D0%B0%D0%BD%D0%B5/metalna-drujkakonsu-za-metla-parcal
Bucket (for the rags)
(2) $4.17
http://konsumativite.com/%D1%83%D1%80%D0%B5%D0%B4%D0%B8-%D0%B8%D0%BF%D0%BE%D1%81%D0%BE%D0%B1%D0%B8%D1%8F-%D0%B7%D0%B0%D0%BF%D0%BE%D1%87%D0%B8%D1%81%D1%82%D0%B2%D0%B0%D0%BD%D0%B5/plastmasova-ovalnakofa-s-cedka
Trays
$91.20 http://www.barmagazin.net/index19.html
Required Inputs:
Sugar
$0.96 http://agro.bg/news/article49442.html
Milk
$1.34 http://www.randi.bg/%D0%9C%D0%9B%D0%95%D0%A7%D0%9D%D0%98%D0%9F%D0%A0%D0%9E%D0%94%D0%A3%D0%9A%D0%A2%D0%98/%D0%9F%D1%80%D1%8F%D1%81%D0
%BD%D0%BE%D0%9C%D0%BB%D1%8F%D0%BA%D0%BE/%D0%9F%D1%80%D1%8F%D1%81%D0%BD%D0%BE%D0%BC%D0%BB%D1%8F%D0%BA%D0%BE-%D0%92%D0%B5%D1%80%D0%B5%D1%8F-3-1%D0%BB.
Salt
$3.21 http://bonusi.bg/offers/Himalaiska-sol-za-energiya-i-zhivot-na-Top-tzena-490lv-za-1kg.html
Corn Syrup
$6.49 http://www.webstaurantstore.com/foxs-light-corn-syrup-1-gallon/999CRNSYRPLT.html
Nuts
$9.16 http://grad.bg/o-859514-Продавам_орехови_ядки
Raisins
$5.44 http://sofia-city.all.biz/susheni-plodove-zlatna-stafida-g116628#.VEI8R_mUdu4
Oreos
$1.86 http://trishur.com/product/903%D0%B1%D0%B8%D1%81%D0%BA%D0%B2%D0%B8%D1%82%D0%B8-oreo
Coconut Powder
$0.75 http://www.naturabg.com/sladkarstvo/217-kokosovi-stargotini-100g.html
Chocolate
(2kg) $26.08 http://www.zoya.bg/%D0%91%D0%B8%D0%BE%D1%88%D0%BE%D0%BA%D0%BE%D0%BB%D0%B0%D0%B4%D0%BE%D0%B2%D0%BA%D1%83%D0%B2%D0%B5%D1%80%D1%82%D1%8E%D1%80-%D0%B7%D0%B0%D0%B3%D0%BE%D1%82%D0%B2%D0%B5%D0%BD%D0%B5-2-%D0%BA%D0%B3.3542
Other Calculations:
Rent
$520.69
http://city-properties.eu/%D0%BF%D0%BE%D0%B4%D0%BD%D0%B0%D0%B5%D0%BC%D0%B1%D0%BB%D0%B0%D0%B3%D0%BE%D0%B5%D0%B2%D0%B3%D1%80%D0%B0%D0%B4/%D0%B8%D
0%B4%D0%B5%D0%B0%D0%BB%D0%B5%D0%BD%D1%86%D0%B5%D0%BD%D1%82%D1%8A%D1%80/%D0%BC%D0%B0%D0%B3%D0%B0%D0%B7%D0%B8%D
0%BD/8888
Water
$0.66 per cubic meter http://vikblg.com/pages/prices
Gas (if we need)
$0.54 per cubic meter http://rilagas.bg/ikonomichnost.html
Electricity
$0.13 per kWh
http://www.daspestimtok.com/uploads/1/1/7/3/11737274/electricity_prices_cez_household_2014-10-01.pdf
30
kWh used
1 500
Electricity
Total $195.00
Water Used
(cubic meter) 25
Water (total) $16.50
1 ft³ of natural gas = 1,087,200 joules
http://www.onlineconversion.com/forum/forum_1059358641.htm
1 ft³ = 0.0283168 m³
1,087,200 joule = 0.0103071 therm
Cubic feet
35.31472483
Joules of energy
38394168.83
Therms in cubic meter 0.3639924003
Price per therm 1.483547458
http://www.peoplesgasdelivery.com/home/gas_calculator.aspx
Using the p
rice per therm from above we get 243.26 a month