Bath Towels

Analysis of Bath TowelsManufacturing

Abstract

The purpose is to analyze the bath towels manufacturing by Miller Company. The report includes, manufacturing process, the budgeted income statement for three months, cost behavior, breakeven in units and dollars, market position and growth possibilities. Finally, the capital budgeting factors have also been discussed.

Manufacturing Process

Bath towels are made up of cotton or cotton polyester. It is woven with a pile or loop to make sure that its softness could absorb the water from the body. The towel may be white, plain dyed, designed with various colors and in printed stripes. The yarn made up of cotton or cotton polyester is used to weave the towels on the loom. When the towels are woven on the loom, the edges of the towels are stitched in the stitching department. Then it is transferred to packing department after proper quality inspection of each towel. They are packed single or with face and wash towels in polythene bags and then they are put into cartons according to the need and requirement of the customer. .

Budgeted Statements

The projected income statement has been made considering 40000 bath towels @$5 each towel.

It is company policy to maintain all inventories including finished goods and material equal to 10% of next month requirement.

Sales Budget / Jan / Feb / Mar / Total
Qty to be sold / 40,000 / 40,000 / 40,000 / 120,000
Selling price / 5 / 5 / 5 / 5
Sales in $ / 200,000 / 200,000 / 200,000 / 600,000
Production Budget
Qty to be sold / 40,000 / 40,000 / 40,000 / 120,000
add Ending Inventory / 4,000 / 4,000 / 4,000 / 4,000
less Beginning Inventory / - / (4,000) / (4,000) / -
Qty to be produced / 44,000 / 40,000 / 40,000 / 124,000
Direct Material Budget
Yarn needed for each towel / 500 gram / 500 gram / 500 gram
Yarn in Kgs / 22,000 / 20,000 / 20,000 / 62,000
add Ending Inventory / 2,000 / 2,000 / 2,000 / 2,000
less Beginning Inventory / - / 2,000 / 2,000 / -
Yarn to be purchased / 24,000 / 20,000 / 20,000 / 64,000
Purchase price per kg / 3.50 / 3.50 / 3.50 / 3.50
Purchase in $ / 84,000 / 70,000 / 70,000 / 224,000
Direct labor Budget
Each towel needs 10 minutes
Total hours required / 7,333 / 6,667 / 6,667 / 20,667
rate per hour $5 / 36,667 / 33,333 / 33,333 / 103,333
Production Overhead
Packing material @5 cent per towel / 2,200 / 2,000 / 2,000 / 6,200
Supervisor Salary / 5,000 / 5,000 / 5,000 / 15,000
Depreciation / 4,000 / 4,000 / 4,000 / 12,000
Insurance / 1,000 / 1,000 / 1,000 / 3,000
Utilities / 8,800 / 8,000 / 8,000 / 24,800
Total Production Overhead / 21,000 / 20,000 / 20,000 / 61,000
Selling and Admin Budget
Commission 3% of sales / 6,000 / 6,000 / 6,000 / 18,000
Advertising / 6,000 / 6,000 / 6,000 / 18,000
Salaries / 25,000 / 25,000 / 25,000 / 75,000
Depreciation / 1,500 / 1,500 / 1,500 / 4,500
Total Selling and Admin expense / 38,500 / 38,500 / 38,500 / 115,500
Income Statement
Sales / 200,000 / 200,000 / 200,000 / 600,000
less cost of goods sold
Direct Material Purchased / 84,000 / 70,000 / 70,000 / 224,000
add beginning Inventory / - / 7,000 / 7,000 / -
less Ending Inventory DM / 7,000 / 7,000 / 7,000 / 7,000
Direct material used / 77,000 / 70,000 / 70,000 / 217,000
Direct Labor / 36,667 / 33,333 / 33,333 / 103,333
Production Overhead / 21,000 / 20,000 / 20,000 / 61,000
Cost of goods manufactured / 134,667 / 123,333 / 123,333 / 381,333
add beginning Inventory / 12,242 / 12,333 / -
less Ending Inventory / 12,242 / 12,333 / 12,333 / 12,333
Cost of goods sold / 122,424 / 123,242 / 123,333 / 369,000
Gross Profit / 77,576 / 76,758 / 76,667 / 231,000
less Selling and Admin / 38,500 / 38,500 / 38,500 / 115,500
Net Income / 39,076 / 38,258 / 38,167 / 115,500

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Fixed and Variable Behavior of Cost

Following is the cost classification according to its behavior, for all expenses. The two behaviors of the cost classification are variable cost and fixed cost.

Production Overhead / Jan / Feb / Mar / Total
Variable cost
Direct Material used / 77,000 / 70,000 / 70,000 / 217,000
Direct labor / 36,667 / 33,333 / 33,333 / 103,333
Packing Material / 2,200 / 2,000 / 2,000 / 6,200
Utilities / 8,800 / 8,000 / 8,000 / 24,800
Total Variable cost / 124,667 / 113,333 / 113,333 / 351,333
Variable cost per unit / 2.8333 / 2.8333 / 2.8333 / 2.8333
Fixed Cost
Supervisor Salary / 5,000 / 5,000 / 5,000 / 15,000
Depreciation Production / 4,000 / 4,000 / 4,000 / 12,000
Insurance / 1,000 / 1,000 / 1,000 / 3,000
Total Fixed Cost / 10,000 / 10,000 / 10,000 / 30,000
Total Production cost / 134,667 / 123,333 / 123,333 / 381,333
Variable cost per unit / 2.8333 / 2.8333 / 2.8333 / 2.8333
Selling and Admin
Variable cost
Commission / 6,000 / 6,000 / 6,000 / 18,000
Fixed cost
Advertising / 6,000 / 6,000 / 6,000 / 18,000
Salaries / 25,000 / 25,000 / 25,000 / 75,000
Depreciation / 1,500 / 1,500 / 1,500 / 4,500
Total Fixed Cost / 32,500 / 32,500 / 32,500 / 97,500
Total Selling and Admin expense / 38,500 / 38,500 / 38,500 / 115,500

Contribution Margin Income Statement

Following is the income statement for first quarter using the contribution margin approach.

Jan / Feb / Mar / Total
Sales / 200,000 / 200,000 / 200,000 / 600,000
less variable cost of production / 113,333 / 113,333 / 113,333 / 340,000
Gross Contribution Margin / 86,667 / 86,667 / 86,667 / 260,000
less variable selling and Admin / 6,000 / 6,000 / 6,000 / 18,000
Net Contribution Margin / 80,667 / 80,667 / 80,667 / 242,000
less fixed cost
Production / 10,000 / 10,000 / 10,000 / 30,000
Selling and Admin / 32,500 / 32,500 / 32,500 / 97,500
Total fixed cost / 42,500 / 42,500 / 42,500 / 127,500
Net Income / 38,167 / 38,167 / 38,167 / 114,500

Break Even and Targeted Sales

Break Even Analysis
CM Ratio / 0.4033
Break Even point in $ / 105372
Break Even point in units / 21074
Margin of Safety / 47.31%
Sales in $ for profit of $5000 / 117769
Sales in units for profit / 23554

The company has to sell around 21000 towels each month to be break-even which is around 53% of total expected sales. It seems that the target would be achievable with the help of effective marketing and advertisement strategies.

Market Trends and Competitors

The bath towel is highly consumable product and it is to be replaced frequently. Unlike carwash towels, the bath towels do not have any problem for demand, however, the innovation in the use of material to produce the product might affect the future of the towel market, and the best example is microfiber towel which was considered to be expensive at one time, now it is affordable. There is also risk of low cost imported products from Asia, specially China and India. However, the company is using technology which is compatible with the change in use of material and every strategy is to produce best quality of towel to beat the imported towels.

Suggestion to increase profit

If the company can maintain quality standard and can also keep the cost at its minimum level, there is lot of potential of growth as the company is earning a good amount of contribution margin per towel which is around 40% of selling price. The company can achieve a reasonable growth rate in the next quarter of the year by using effective marketing strategies, as there is no problem with the demand of the product.

Factors of Capital Budgeting

To meet the growth in future the company will have to buy more looms to weave additional number of towels to be produced in the future. The investment to purchase looms may be done by using debt or equity financing sources. The weighted average cost of capital will be sued as discount rate to determine the present value of future cash flows. The future expected cash flow is to be calculated for the life of additional looms. The future cash inflows will be the difference of incremental revenues and incremental expense due to the use of new looms.All incremental expenses are considered to be relevant cost for decision making purpose. This incremental cost will be the combination of all variable cost and additional fixed cost due to the use of new looms in future. The incremental cash flow will be discounted by using the weighted average cost of capital, to determine the present value of all future cash flows. If the initial investment is less than the present value, the net present value will be positive and the project will be accepted, otherwise not.The technique is called net present value method and it is widely used for decision making of investment in future potential projects.

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