Case Study -QA240


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The Case
 

Project MUSE Empire building Group Ltd – initial 12-month financial forecast for start-up business plan
 

The Project MUSE Group Ltd is now entering the final stages of preparation before the launch of their venture. Much market testing has been done and results have been overwhelmingly favourable. Suppliers and creditors have been secured. A staffing contract has been signed with a local HR supply firm that will advertise and screen for suitable candidates to fill future staffing needs. Distribution, transportation and logistics have been procured and all details of timing, volume, and price have been agreed upon.
While MUSE is highly anticipating their initial project launch; they have also begun to set their sights on expansion into neighbouring Thailand in the next 18 months. While language, culture and regulations different, the untapped demand makes the obstacles acceptable.
 

Production and distribution arrangements
 

The venture is a mobile phone case manufacturing business, which will initially produce only a single phone case. The case will be transported across Vietnam via a distributor. To minimize costs and establish clear costing guidelines, MUSE’s inventory and production details includes
 

• Ending inventory required will equal 25% of the next month’s sales as a precaution against stock-outs.
• There is only one type of raw material used in production. Space-aged plastic (SAP) is a very compact material that is purchased in powered form at a cost of $0.45 per kilogram. SAP supplier is somewhat unpredictable thus MUSE finds its necessary to maintain an inventory balance equal of to 100% of the following month’s production needs.
 

• 2 kilograms of SAP is required to make a single mobile phone case. Indirect materials cost $0.20 per unit. Environmental fee per unit is $0.15. Plant maintenance is $0.30 per unit. Other manufacturing costs are $0.05 per unit.
• Employees are paid on a per unit basis. Their total pay each month is, therefore, dependent on production volumes and averages $9.00 per hour.
• Each unit spends 20 minutes in production
 

• MUSE has negotiated with the supplier a 30-day supplier credit arrangement for payment of the monthly shipment. No early payment discount
• As MUSE is situated within 100 kilometres of its raw material supplier, delivery (when available) has a lead-time of only hours.
•  

The supplier has committed to this purchase schedule.
 

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Forecast Sales Volume for the First Year of Operation
 

MUSE’s market research indicates that they can realistically forecast initial monthly sales volume of 1000 items, through electronic retailers throughout the country. Sales arrangements have already been negotiated. The distributor will charge a fee of 12% of all sales value and will assume responsibility for any commissions due to retailers
MUSE forecasts, somewhat conservatively, that sales for the month 2 and month 3 will be 1000 items in each month. No sales in first month of operations
 

Market research also indicates that the product is likely to be well received by the target group, so MUSE forecasts that in Quarter 2 a 2.5% volume increase is realistic. They again conservatively plan Quarter 3 will see a 8% increase. In Quarter 4 a 15% increase in forecasted. After the first year, market saturation is expected thus a constant growth of 3% is expected. Forecast figures are cumulative. Round sales figures up/down to the nearest unit (no fractional units).
 

The initial per unit selling price will be $15, and this will not change in the first year.
The distributor insist that they be given the below credit terms to pay for the stock that they will sell for MUSE through their many stores and outlets. Since this is industry practice, MUSE has had acquiesce to this request. Nevertheless, research based on the payment experience of other distributors follows a pattern as follows
 

• 1st month after sale 70%;
• 2nd month after sale 25%;
• 3rd month after sale 5%
 

Capital assets required
 

MUSE estimates that initial requirement for capital assets will be
 
• Computer and printer $5,000
• Estimated life: 2 years
• Depreciate straight line
• Nil salvage value
• Motor vehicle $25,000
• Estimated life:4 years,
• Depreciate straight line
• Nil residual
• iPad $ 500
• Estimated life one year
• Write-off in year 1
 

Product Code: Case Study -QA240
 
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Summary