Dental Toothbrushes

Analysis of Dental Toothbrushes Manufacturing

Abstract

The purpose is to analyze the dental toothbrushes manufacturing by Ross Company. It has been done by covering various aspects such as manufacturing process, the budgeted income statement for three months, cost behavior, contribution margin income statement, breakeven point, market condition and future expansion possibility.

The Manufacturing Process

The process is to produce toothbrushes is based on use of various machines, such as molding, filling and trimming machines. The direct material being used is the plastic handle and the bristles made up of nylon or natural boar.

The process starts by mixing and shaping the plastic in pellets and then molding machine is used to melt it. Then the use of rotating screw and plunger make it possible to convert melted plastic into handle. The bristles are inserted in small cores of plastic handle. Filling machine is used to staple the bristles on plastic handle with tiny metal. After use of molding and trimming machines, the bristles do have various lengths on plastic handle, therefore on trimming machine the length is adjusted to make it of standard size as per specific design of each brush. Finally, when they are ready are packed into containers made up of cardboard or plastic.

Budgeted Statements

All statements have been made considering the fact that the company will be able to sell 50000 brushes @$3 per brush each month during the first year of operation.

It is company policy to maintain 20% of next month sales and 10% of next month material requirement as inventory.

Sales Budget / Jan / Feb / Mar / Total
Qty to be sold / 50,000 / 50,000 / 50,000 / 150,000
Selling price / 3 / 3 / 3 / 3
Sales in $ / 150,000 / 150,000 / 150,000 / 450,000
Production Budget
Qty to be sold / 50,000 / 50,000 / 50,000 / 150,000
add Ending Inventory / 10,000 / 10,000 / 10,000 / 10,000
less Beginning Inventory / - / (10,000) / (10,000) / -
Qty to be produced / 60,000 / 50,000 / 50,000 / 160,000
Direct Material Budget
Plastic required for each brush / 15 gram / 15 gram / 15 gram
Plastic required in kg / 900 / 750 / 750 / 2,400
add Ending Inventory / 75 / 75 / 75 / 75
less Beginning Inventory / - / (75) / (75) / -
Plastic to be purchased / 975 / 750 / 750 / 2,475
Purchase price per kg / 20 / 20 / 20 / 20
Purchase in $ / 19,500 / 15,000 / 15,000 / 49,500
Bristles required for each brush / 3 gram / 3 gram / 3 gram
Bristles required in kg / 180 / 150 / 150 / 480
add Ending Inventory / 15 / 15 / 15 / 15
less Beginning Inventory / - / (15) / (15) / -
Bristles to be purchased / 195 / 150 / 150 / 495
Purchase price per kg / 50 / 50 / 50 / 50
Purchase in $ / 9,750 / 7,500 / 7,500 / 24,750
Total Purchase in $ / 29,250 / 22,500 / 22,500 / 74,250
Direct labor Budget
Each brush requires 1 minutes
Total hours required / 1,000 / 833 / 833 / 2,667
rate per hour $10 / 10,000 / 8,333 / 8,333 / 26,667
Production Overhead
Packing material @3 cent per brush / 1,800 / 1,500 / 1,500 / 4,800
Supervisor Salary / 4,000 / 4,000 / 4,000 / 12,000
Depreciation / 3,000 / 3,000 / 3,000 / 9,000
Insurance / 1,500 / 1,500 / 1,500 / 4,500
Utilities / 6,000 / 5,000 / 5,000 / 16,000
Total Production Overhead / 16,300 / 15,000 / 15,000 / 46,300
Selling and Admin Budget
Commission 3% of sales / 4,500 / 4,500 / 4,500 / 13,500
Advertising / 3,000 / 3,000 / 3,000 / 9,000
Salaries / 15,000 / 15,000 / 15,000 / 45,000
Depreciation / 1,500 / 1,500 / 1,500 / 4,500
Total Selling and Admin expense / 24,000 / 24,000 / 24,000 / 72,000
Income Statement
Sales / 150,000 / 150,000 / 150,000 / 450,000
less cost of goods sold
Direct Material Purchased / 29,250 / 22,500 / 22,500 / 74,250
add beginning Inventory / - / 2,250 / 2,250 / -
less Ending Inventory DM / 2,250 / 2,250 / 2,250 / 2,250
Direct material used / 27,000 / 22,500 / 22,500 / 72,000
Direct Labor / 10,000 / 8,333 / 8,333 / 26,667
Production Overhead / 16,300 / 15,000 / 15,000 / 46,300
Cost of goods manufactured / 53,300 / 45,833 / 45,833 / 144,967
add beginning Inventory / 8,883 / 8,883 / -
less Ending Inventory / 8,883 / 8,883 / 8,883 / 8,883
Cost of goods sold / 44,417 / 45,833 / 45,833 / 136,084
Gross Profit / 105,583 / 104,167 / 104,167 / 313,916
less Selling and Admin / 24,000 / 24,000 / 24,000 / 72,000
Net Income / 81,583 / 80,167 / 80,167 / 241,916

.

Fixed and Variable Cost Classification

Both production and selling & admin expenses have been classified as fixed and variable cost as follows:

Production Overhead
Variable cost
Direct Material used / 27,000 / 22,500 / 22,500 / 72,000
Direct labor / 10,000 / 8,333 / 8,333 / 26,667
Packing Material / 1,800 / 1,500 / 1,500 / 4,800
Utilities / 6,000 / 5000 / 5000 / 16000
Total Variable cost / 44,800 / 37,333 / 37,333 / 119,467
Variable cost per unit / 0.7467 / 0.7467 / 0.7467 / 0.7467
Fixed Cost
Supervisor Salary / 3,000 / 3,000 / 3,000 / 9,000
Depreciation Production / 5,000 / 5,000 / 5,000 / 15,000
Insurance / 500 / 500 / 500 / 1,500
Total Fixed Cost / 8,500 / 8,500 / 8,500 / 25,500
Total Production cost / 53,300 / 45,833 / 45,833 / 144,967
Variable cost per unit
Selling and Admin
Variable cost
Commission / 4,500 / 4500 / 4500 / 13500
Fixed cost
Advertising / 3,000 / 3,000 / 3,000 / 9,000
Salaries / 15,000 / 15,000 / 15,000 / 45,000
Depreciation / 1,500 / 1,500 / 1,500 / 4,500
Total Fixed Cost / 19,500 / 19,500 / 19,500 / 58,500
Total Selling and Admin expense / 24,000 / 24,000 / 24,000 / 72,000

Contribution Margin Income Statement

Sales / 150,000 / 150,000 / 150,000 / 450,000
less variable cost of production / 37,333 / 37,333 / 37,333 / 112,000
Gross Contribution Margin / 112,667 / 112,667 / 112,667 / 338,000
less variable selling and Admin / 4,500 / 4,500 / 4,500 / 13,500
Net Contribution Margin / 108,167 / 108,167 / 108,167 / 324,500
less fixed cost
Production / 8500 / 8500 / 8500 / 25500
Selling and Admin / 19,500 / 19,500 / 19,500 / 58,500
Total fixed cost / 28000 / 28000 / 28000 / 84000
Net Income / 80,167 / 80,167 / 80,167 / 240,500

Break Even and Targeted Sales

break Even Analysis
CM Ratio / 0.7211
Break Even point in $ / 38829
Break Even point in units / 12943
Margin of Safety / 74.11%
Sales in $ for profit of $5000 / 45763
Sales in units for profit / 15254

To make it easier for the company to achieve a target where the company can earn enough to cover all cost, and which is around 13000 units, which is 26% of total sales, which seems to be easily achievable.

Market Trends and Competitors

It is a highly consumable item, as most of the population in the country and around the world not only uses it but they need it to change on frequent basis, therefore the product has a big market both domestic and internationally. The product is being used by more than 93% of population by groups of ages, but it is very critically for kids and the kid tooth brush market is also very attractive and demanding. Around 25% of market share of toothbrushes is shared by Gillette and Colgate and they are market leaders. Like other product the market share can be captured by providing better quality of goods at competitive pricing, but the toothbrush is a little different than other products, it is mainly linked with how you have marketed and advertised your product, especially kid toothbrushes. The good result for increased sales can be achieved by using aggressive marketing strategy.

Suggestion to improve profit

Overall picture of the business is very bright as it is showing a hefty amount of net income for the first quarter and there is potential to make more sales, as the contribution margin is around 72% of selling price which is quite enough to cover all fixed costs of the business. The more sales can be achieved to improve the bottom line, by tapping the new customers through aggressive marketing and advertisement. Furthermore, the product is produced by using three machines; except for molding machine company has the capacity to produce another 50000 units of toothbrush if another molding machine is purchased. The investment in new molding machine will make it possible to improve the bottom line and the company can do it as the company has been earning good amount of net income.

Capital Budgeting Factors

The capital budgeting decision is always a critical one, as the success of one decision can groom the company otherwise it may broom it. In our example, if company has to invest in molding machine, the company will have to decide how to finance it, either from debt or equity. But it seems that as the company has enough earnings therefore the financing would be made from equity source of financing. After deciding from where to finance, the company needs to determine the cost of capital. This cost of capital will be used to discount the future cash flow to arrive at the present value, and if the present value will be more than the initial investment the project should be accepted otherwise not, the technique is called net present value method.

In calculating the company will have to determine the incremental cash flows which will be the net difference of incremental revenues and incremental expenses. The incremental revenues will be the difference of increased sales and the current sales. And the incremental expenses will be difference of increased expense and the current expenses. All incremental expense is relevant cost for the company. And all variable costs are relevant cost for the company. But except for depreciation of new machine and addition of new supervisor’s salary, all fixed costs are irrelevant.

References