Executive Summary
Overview
Luxury Living Inc. Company specializes in the manufacturing of comfortable sleeping products. The idea was formulated by its two founders, who were suffering from insomnia and discovered a need in the market that was not addressed. The company is located at Cove on Sentosa Island in the south of Singapore. Luxury living produces three main products; Deep sleep blankets, Luxury snooze downers, and High-end pillows. The company is in its early stage of development; hence as not established a stable market share nor expanded its operations to other branches. Luxury living Inc. has a geographic opportunity since very minimal competition is available in the area.
Mission Statement
To provide quality, affordable, and reliable sleeping products for people suffering from different chronic illnesses hence boosting their recovery and well-being.
Vision Statement
Luxury Living Inc. aims to improve the standards of living for people suffering from chronic illnesses by improving the quality of sleep and rest they receive from using our products.
Objectives
- Provide quality, reliable and affordable products and services that are at a world-class level.
- Impact livelihood by improving the quality of sleep and rest people get when using our products.
- To be a leading manufacturing company and supplier of quality and luxurious sleeping products in Singapore and internationally.
- Improve sleeping patterns and sleep quality of chronic patients.
Our Team
Luxury Living Inc. is a private partnership company founded by Slumbers and Snooze. Each partner has an equal share of 30%. The remaining 40% of shares are owned by various investors who are not directly involved in the operation of the business. Besides the two founders who form the management team, the company has 20 employees involved in the manufacturing, packaging, marketing, and distribution of the products. We have a highly competent team hence do not compromise the quality of our products.
Financial Projections
The company focuses on manufacturing three sleeping products which are; Deep sleep blanket, a Luxury snooze downer, and a High-end pillow in the product mix ratio 50:25:25 respectively. The management predicts a sales volume of 20,000,000 units altogether. This sales volume will guarantee the company a profit of $30,000,000. If the company operates as projected, the business will be a profitable endeavor resulting in a high growth rate.
Introduction
Luxury Living Inc. was established to solve sleeping problems for patients suffering from chronic diseases such as insomnia. According to Zada et al. (2019), sleep is essential as it contributes significantly to the development of a healthy brain. The founders found a need that had not been addressed in the market and pursued it to start a business. The company is located in a small town, Cove, on Sentosa Island in the south of Singapore. The company enjoys an opportunity of having less competition in the area. In addition, they are advantaged by having zero taxes, a tropical climate in the area, and a good supply of materials and distribution services due to growing manufacturing industries.
However, the company is still in the early stages of development and has not developed a financial history. Since the industry is new in the area, the management has to work with financial projections. They aim to produce 20,000,000 product units before the closure of the year. Among the three products, a Deep sleep blanket, Luxury snooze downer, and High-end pillow, they plan on using a 50:25:25 product mix. This level of production is expected to raise a revenue of $30,000,000. The goal seems to be unrealistic as time progresses. Thus, the management has to struggle to break even in the year. They are full f uncertainty about their next financial action. Below are some of the calculations they should consider when making a financial decision.
Cost-Volume-Profit Analysis
The breakeven point for ‘Luxury Living Inc’ in the current year of production
CVP= FC/ CM
FC is fixed costs
CM is contribution margin
CM= sales- variable cost
Targeted net income= $30,000,000
Current sales mix = 50:25:25.
Calculation of fixed costs
Total fixed cost= $658,400,000
Calculation of variable costs
CM= (selling price- variable cost) per unit
Deep sleep blanket CM=108.90 – 68.5= 40.40
Luxury snooze downer CM= 166.90 – 96.25= 7.60
High end pillow CM=145.90 – 87.40= 58.50
Total Contribution margin =$106.50
Break even= fixed costs/ CM
658,400,000/ 106= 6,211,320.75
To break even, the company must sell products worth $6,211,320.75
Using the product mix;
50:25:25
The company should sell;
Deep sleep blanket = 50/100* 6,211,320.75
$3,105,660.377/ 108.90 =28518 products
Luxury snooze downer = 25/100*6,211,320
$1,552,830/ 166.9 =9,303 products
High-end pillow= 25/100*6,211,320
$1,552,830/87.4 =177,629 products
In total, Luxury Living must sell 55,450 products to break even.
For the project to be viable, the amount invested should be less than the incurred profits.
ROI = amount of profit/ amount invested
$30,000,000/ (658,400,000+((68.25*28518)+ (96.25*9303)+ (58.5*177,629))
30,000,000/ 658,400,000 + (1,946,353.5+895,413+ 10,391,296.5)
30,000,000/ 13,233,063 = ROI= 2.267
The project has a positive ROI thus viable
Key Assumptions of CVP
To make a CVP analysis, several factors are assumed:
- In the above calculations, the selling price is assumed to remain constant throughout the calculated period (Lulaj and Iseni, 2018).
- The variable and fixed costs are also assumed to remain constant.
- In addition, it has been assumed that any changes in expenses occur due to changes in production levels (Abdullahi, et al. 2017)
- All the products produced are sold.
CV Analysis for Option 1
The viability and impact on the financial performance and operations of ‘Luxury Living Inc’
Option 1: Increase all selling prices by 20% and adjust the sales mix to be 30:30:40.
Calculation of new selling price
Calculation of Contribution Margin
New product mix= 30:30:40
Break-even point sales= $6,211,320.75
Products to be sold;
Deep sleep blanket = 30/100*6,211,320.75 =1,863,396.225
1,863,396.225/130.68 =14,259 products
Luxury snooze downer= 62,113
30/100* 6,211,320.75 =1,863,396.225
1,863,396.225/200.28 =9,303.95
High-end pillow= 55,458
40/100* 6,211,320.75 =2,484,528
2,484,528/175.08 =14,190.817
Total sales= 37,753 products
By increasing the sales price and introducing a new product mix, Luxury living Inc. increases its operational income by reducing production of Deep sleep blankets, Luxury snooze downers, and High-end pillows to; 14,259, 9,303, and 14,190 respectively.
Assumptions made in Operating leverage income
- Fixed costs remain constant throughout the period
- The products sales volume is correspondent to the production mix (Dudycz, 2020)
- The variable costs are only affected by the change in activities (Chiladze, 2020).
Incremental Analysis
The viability of Option 2 and Option 3 ‘Luxury Living Inc’ may adopt in the next year of production
Option 2: Eliminate the High-End Pillow line. However, if they eliminate the High-End Pillow line $75,000,000 of the fixed manufacturing overhead, $30,000,000 of the fixed administrative overhead, and $50,000,000 of the fixed marketing currently allocated to the High-End Pillow line will need to be reallocated to Deep Sleep Blanket and Luxury Snooze Downer lines as per the following schedule:
Deep Sleep Blanket Luxury Snooze Downer
$45,000,000.00 $30,000,000.00
$15,000,000.00 $15,000,000.00
$20,000,000.00 $30,000,000.00.
Total fixed cost increment in Deep sleep blanket= 80,000,000
Total fixed increment in luxury snooze downer= 75,000,000
New fixed cost
A change in fixed costs does not translate to a change in production volume. Hence if production remains constant;
Profit= sales revenue- production cost
Deep Sleep Blanket =784,080,000- (165,000,000 + 374,580,000) =244,500,000
Luxury Snooze Downer=1,201,680,000 – (153,000,000+624,180,000)= 424,500,000
Total revenue= $669,000,000
Before elimination of High-end pillow, Total production cost was; $676,352,569.2
Sales revenue was= $6,211,320.75
Sales profit was= -670,141,248.45
Hence option 2 was viable as it would lead to a profit of $669,000,000
Option 3: Rather than manufacture the luxury snooze downer elects to purchase from an independent third party for $60. If Slumber and Snooze elected to purchase the luxury snooze downer from an independent third party, fixed costs incurred by that manufacturing line would decline by 50%. Also, Snooze and Slumber would be able to rent the space currently used to manufacture the luxury snooze downer for $750,000.
Since the product mix is 50:25:25
The company needs to incur $60*=238,896
= 14,333,760
Production fixed production cost will reduce to 50%* 230,400,000= 115,200, 000
The following changes will occur:
New total fixed cost= (15,200,000+230,000,000+ 198,000,000)
=443,200,000
New variable costs= (68.25*10,000,000) + (87.40*5,000,000)
= (682,500,000+437,000,000)
=1, 1119,500,000
Total cost of production will be;
443,200,000+1, 1119, 500,000=
=1,562,700,000+30,000,000= 1,592,700,000
Sales revenue will be;
(108*10,000,000) + (166.90*5,000,000) + (145.90*5,000,000)
=1,008,000,000+834,500,000+729,500,000=
=1,565,008,000
Income= (1,565,008,000+750,000) – 1,592,700,000
=-26,942,000
Option 3 will lead the company to a loss of $26,942,000, therefore, not viable.
Quantitative and/or qualitative characteristics are considered in the incremental analysis
- Relevant cost; this refers to any avoidable costs incurred during production. They should be considered when making incremental analysis decisions (Du et al., 2020).
- Marginal profit; the profit incurred due to an increment or decrement in the production of a particular product.
- Production cost; the price or amount forwent during the production of products (Du et al., 2020)
- Absorbed cost; the fixed and variable costs incurred when producing an item.
Conclusion
After analysis of Luxury Living Inc. financial performance, they are a possibility of breaking even or making a profit. The projected income is higher than the practical figures used in calculations. Despite having a good opportunity for production such as lack of competition, favorable climate, availability of materials and transportation, among others, Luxury Living management had over-projected the level of income.
Conversely, for the company to either break even to avoid making a loss or close at a profit, they need to make urgent financial decisions. These decisions include either changing the production mix ratio or increasing the prices of their products. Using a CVP analysis above, the company must earn $166,278,396.96 to break at an even point. Another viable strategy to solve the financial problem is increasing the selling price of goods by 20%. This increment will lead to the company having an incremental profit of 2.59, 1.585, and 1.393 in Deep sleep blankets, Luxury snooze downers, and High-end pillows respectively. On the other hand, purchasing a luxury snooze downer from a third party would lead the company to a loss of $26,942,000, hence not viable.
References
Abdullahi, S. R., Bello, S., Mukhtar, I. S., & Musa, M. H. (2017). Cost-volume-profit analysis is a management tool for decision-making in small business enterprises within Bayero University, Kano. Your Journal Of Business And Management (Iosr-Jbm), 19(2), 40-45.
Chiladze, I. (2017). Factor analysis aspects of the enterprise’s operating leverage.Applied Finance and Accounting, 3(1), 75-82.
Du, Y., Yang, B., & Hu, H. (2018). Incremental analysis of temporal constraints for concurrent workflow processes with dynamic changes. IEEE Transactions on Industrial Informatics, 15(5), 2617-2627.
Dudycz, T. (2020). The Mystery of Operating Leverage. Available at SSRN 3578189.
Lulaj, E., & Iseni, E. (2018). Role of analysis CVP (Cost-Volume-Profit) as an important indicator for planning and making decisions in the business environment. European Journal of Economics and Business Studies, 4(2), 99-114.
Zada, D., Bronshtein, I., Lerer-Goldshtein, T., Garini, Y., & Appelbaum, L. (2019). Sleep increases chromosome dynamics to enable the reduction of accumulating DNA damage in single neurons. Nature communications, 10(1), 1-12.