Question

A new mechanical component manufacturing company is preparing its business plan to generate money. The company is to start in 2019 gaining the gross revenue from selling mechanical products. In 2018, a research shows that the market size is equal to $500 million and grows at the rate of 10% yearly. In addition, the company states that the production demand is 200 units per hour with 50 working hours per week and 50 weeks follows: Question 7 (20 marks: per year. Other financial information are as The company set the price as $100 per unit The material cost is $20/unit - The labor cost per unit is 15% of the unit price The manufacturin · g overhead per unit is 50% of the material cost - To manufacture these products the company would like to purchase a $3 million equipment at the beginning of 2019, which can be used for 5 years with zero market value at end of the fifth year In 2019, the space rent is $1.5 million, salaries are $2.6 million, advertisement is $4 million, maintenance is 10% from equipment price, and other operating expenses are S20 - million The assets of this company at the beginning of 2019 are equal to $90 million while the total equities + liabilities equal to $80 million. To balance the difference between the assets and liabilities, the company decided to take a loan from the bank with yearly - interest of 5% -The company must pay a tax of 5% from the net income a) Calculate the following: Market size (in millions of S) Market share (as a percentage) Gross revenue (in millions of S) Total manufacturing cost (in millions of S) Total operating expenses (in millions of S) Interest paid to the bank (in millions of S) Net Income before tax (in millions of S) Net Income after tax (in millions of S) Net income (as a percentage) b) Calculate the number of units to be produced per hour to breakeven.

Answer 1

Market size $500 Million = 500,000,000

Yearly growth 10% = 500,000,000 X 10 %= 50,000,000 = 50 Million growth Every year

Production Demand = 200 unit /hr, 50 hr /week, 50 week/year

Net total demand = 500,000 units annually

Price per unit = 100 $

Total amount receivable if total demand is met = 500,000 X 100 = $ 50,000,000 ( Revenue generated if production is met)

Now,

Total investment cost

Material cost = $ 20/ Unit

Total Material cost shall be = 20 X 500,000 = $ 10,000,000

Labor Cost = $ 3/Unit

Total Labor Cost = 3 X 500,000 = $ 1,500,000

Manufacturing Over head = $ 10/Unit as 50 % of material cost.

Total Manufacturing overhead = 10 X 500,000 = $ 5,000,000

Manufacturing Equipment = $ 3,000,000 for five years

Space rent = $ 1,500,000

Salaries = $ 2,600,000

Advertisement = $ 4,000,000

Maintenance= $ 300,000

Operating Expenses = $ 2,000,000

Assets of Company = $ 9,000,000

Equity + Liability = $ 8,000,000

Loan needs to be taken = 9,000,000-8,000,000= $ 1,000,000

Interest = 5 % annually = $ 500,000 Annually

Total investment is calculated below

Material cost = $ 10,000,000 +

Labor cost = $ 1,500,000 +

Manufacturing cost = $ 5,000,000 +

Space rent = $ 3,000,000 +

Salaries = $ 2,600,000 +

Advertisement = $ 4,000,000 +

Maintenance = $ 300,000 +

Operating expenses = $ 2,000,000 +

Interest on loan = $ 500,000  

Total Investment = $ 30,400,000

Selling price = $ 50,000,000

Total Income Before tax = $19,600,000 for first year

Tax 5% = 980,000 annually for first year

Total income after tax = $ 18,620,000 first year

Total Operating Expenses is calculated as a sum total of Labor cost, space rent, salaries, advertisement, maintenance and operating expenses = $ 11,900,000.

Gross Revenue = $ 50,000,000

Total Market = $ 500,000,000

% Market share = 10%

Number of unit produced to reach break even = when the net investment is reached.

This implies that to reach Total Investment = $ 30,400,000 we need to calculate the number of unit needs to be produced per hour = 30400000/100/50/50= 121.6 units per hour.