Running Heading: FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

Financial Analysis for Washer Dryer Manufacturer

University of the People

Instructor: Dr. Jenice Armstead

Marketing Management (BUS 5112)

Project Group 0017B

March 18, 2020

Group Members

1. Obed Amoasi

2. Ebenezer Atiapa

3. Samuel Yeboah Boateng

4. Jeff Branez Medrano

5. Blessing Hadehou

6. Chikara Nwoke
FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

Team Page

Team Member Roles Responsibilities Participation Status

Ermias Kahsu Team member Contributed immensely to

the project.

Grace Onyenokporo Team member Responsible for

organization and

presentation.

Samuel Yeboah Team member Assemble and negotiate

Boateng with team members for

effective collaboration

Tu Nguyen Team member Contributes to project and

keep the project manager

informed of progress.

Abstract

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

A global washer and dryer manufacturer is offering two core washer and dryer sets: a

high-end model and an economic model. The company wanted a better understanding of their

business to make budgeting and sales goals decisions. The company tasked a team of

consultants on a multi-year basis to complete several calculations and present findings to the

company stakeholders.

The company wants to know the break-even point quantity for the two models given

information for sales, variable cost, and fixed cost. They also want to determine the quantity

for target profit.

The company wanted to purchase machinery and equipment to set up a line with an initial

cast out lay of $150,000. Based on the company’s estimation for future costs and sales, the

company wants to know their investments breakeven quantity, which they estimated to

happen in the 2nd year, the contribution margin that is ready to absorb the company’s fixed

costs, and they want to know the viability of the capital budget analysed by NPV and IRR.

The management is concerned with the viability of the washer-dryer combination. Therefore,

there needs to be made a differential analysis based on the latest annual information of the

product lines to drop or keep the washer-dryer product line.

Keywords: Global washer, High-end model, Economic model, Budgeting, Sales, Consultants,

break-even, variable cost, fixed cost, NPV and IRR

Introduction

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

This project is about analysing on a multi-year basis for a global washer and dryer

manufacturer. The terms used for the paper are defined below;

Breakeven point: is the level of production at which the costs of production equal the

revenues for a product (Mitchell, 2019). It is the point at which total cost and total revenue

are equal. A break-even point analysis is used to determine the number of units or dollars of

revenue needed to cover total costs (Break Even Analysis ,n.d.).

At the break-even point, a business does not make a profit or loss. At this point, variable and

fixed costs have all been recovered and profit begins. Break-even Quantity refers to the

number of units of firm’s product that is produced and sold at which point the company’s net

income becomes zero. Break-even quantity is obtained by dividing the fixed cost over the

difference between price and variable cost .

Differential analysis (incremental analysis): is a management accounting technique in

which we examine only the changes in revenues, costs and profits that results from a business

instead of creating complete income statements for each alternative (Xplaind, n.d.).

Formula: Differential Profit (Loss) = Differential Revenue – Differential Cost

Product line: Can be understood as an array of related products, under a specific brand,

offered by a particular company to its customers (Business Jargons, n.d.).

NPV: Is the value of all future cash flows (positive and negative) over the entire life of an

investment discounted to the present (CFI, n.d.).

The NPV Rule:

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

 If the NPV is greater than or equal to zero, accept the investment otherwise, reject

the investment (Heisinger & Hoyle, n.d.)

Internal Rate of Return: is the interest rate at which the net purchase value of all the cash

flows (both positive and negative) from a project or investment equal to zero

(Investinganswers, 2019).

Contribution margin: Can be stated on a gross or per unit basis. It represents the

incremental money generated for each product or unit sold after deducting the variable

portion of the firms cost (Investopedia Staff, 2019).

Part 1

Breakeven Quantity

High End Model Product Line;

a. Total Fixed costs = Direct Fixed cost per unit + Allocated Fixed cost per unit

= 25,000 + 85,000 = 110,000 $/month

b. Total Variable cost = Direct Labor per unit + Direct Material per unit

= 1,400 + 875 = 2,275 $/unit

c. Breakeven point Quantity = Fixed costs / (sales price/unit – variable cost /unit)

= 110,000/month / (3,500/unit – 2,275/unit) = 89,795 units/month

Interpretation for High End Product Line;

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

The company must sale 89.795 units per month of the high end model product to

cover all the production costs of 314,283.625 $/month

a. Total variable cost/month = Total variable cost per unit * Breakeven quantity/month

= 2275 $/unit * 89.795 units/month = 204,283.625 $/month

b. Total Fixed cost/month = 110,000 $/month

c. Total production cost per month = 204,283.625 $/month + 110,000 $/month

= 314,283.625 $/month

If the company sales the 89.795 units from the breakeven point quantity at 3,500$ for high

end model product line, then this product line fully absorbs the costs allocated to it.

a. Total Sales at breakeven point = 3,500$/unit * 89.795 units/month = 314,283.625

$/month

(At breakeven point, Total sales revenue equals Total cost incurred for production.)

Economic Model Product Line;

a. Total Fixed cost = Direct Fixed cost per unit + Allocated Fixed cost per unit

= 16,500 + 85,000 = 101,500 $/month

b. Total Variable cost = Direct Labor per unit + Direct Material per unit

= 250 + 300 = 550 $/unit

c. Breakeven point Quantity = Fixed costs / (sales price/unit – variable cost /unit)

= 101,500/month / (1000/unit – 550/unit) = 225.555units/month

Interpretation for Economic Model Product Line;

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

The company must sell 225.555 units per month of the economic model product to

cover its total production cost of 225,555.2 $/month.

a. Total variable cost per month = Total variable cost per unit * Breakeven

quantity/month = 550$/unit * 225.555 units/month = 124,055.25 $/month

b. Total Fixed cost per month = 101,500 $/month

Total production cost incurred per month = 225,555.25 $/month

Breakeven Quantity

High End Model;

To earn 500,000 per year margin on High end model

Total fixed cost per year = Total fixed cost per month * 12months

= 110,000$/month * 12months = 1,320,000 $

Sales = Total variable cost + Total fixed cost + Target profit

(units * 3,500$) = (units * 2275$) + 1,320,000$ + 500,000$

Units * (3,500$ – 2,275$) = 1,820,000$

Units = 1,485.714 units/year

Interpretation for High End Model;

The company must sell a total of 1,485.714 units per year to absorb a total cost of

4,700,000$ per year to earn 500,000$ per year margin.

Total sales revenue per year = 1,485.714 units * 3,500$/unit = 5,200,000 $

Total cost incurred per year = Total variable cost per year + Total fixed cost per year

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

= (1,485.714units/year*2275$/unit) + 1,320,000$ = 4,700,000$/year

Margin per year = 5,200,000 – 4,700,000 = 500,000 $/year

Economic Model;

To earn 300,000$ per year margin on the economic line

Total fixed cost per year = Total fixed cost per month * 12months

= 101,500$/month * 12month = 1,218,000$

Sales = Total variable cost + Total fixed cost + Target profit

Units * (1000 – 550) = 1,218,000$ + 300,000$

Units = 3,373.333 units

Interpretation for Economic Model;

The company must sell a total of 3,373.333 units of economic line per year to absorb a total

cost of 3,073,333 $per year and to earn 300,000$ per year margin.

Total sales revenue per year = 3,373.333 units/year * 1000$/unit = 3,373,333.333 $/year

Total cost incurred per year = Total variable cost per year + Total fixed cost per year

= (3,373.333units/year*550$/unit) + 1,218,000$/year = 3,073,333.333$/year

Margin per year = 3,373,333.333 $/year - 3,073,333.333$/year = 300,000 $/year

Part 2

To find first the breakeven point which is expected to occur in two year:

Total variable cost = D.L + D.M = 595 + 795 = 1,390 $/unit

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

Total direct fixed cost = Direct fixed cost for year 1 + Direct fixed cost for year 2

= (20,750$/month*12month) + (20,750$/month*12month) = 498,000$/year

Break-even Quantity = Fixed costs / (sales price/unit – variable cost /unit)

= 498,000$/year / (2,250$/unit – 1,390$/unit) = 579.07 units/year

Sales in units for the 1st year = 55% * BEP = 0.55 * 579.07 = 318.49 units

Sales in units for the 2nd year = 45% * BEP = 0.45 * 579.07 = 260.58 units

Contribution Margin

For year 1:

 Sales = sales price per unit * units = 2,250 * 318.49 = 716,602.5$

 Variable cost = V.C per unit * units = 1,390 * 579.07 = 804,907.3$

 Contribution Margin = Sales – Variable cost = 716,602.5 - 804,907.3 = -88,304.8$

The negative sign of contribution margin tells that the sales are not enough to cover the

variable costs and further the fixed costs during year 1.

Total uncovered costs during year 1 = 88.304.8 + 249,000 = 337,304.8$

For year 2:

 Sales = sales price per unit * units = 2,250 * 260.58 = 586,305$

 Contribution Margin = Sales – Variable cost = 586,305 – 0 = 586,305$

This contribution margin absorbs the uncovered costs from year 1 and the direct fixed cost

incurred in year 2.

Total uncovered costs during year 2 = 337,304.8 + 249,000 = 586,305$

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

At break-even point: Sales revenue = Uncovered costs

Net = 586,305 – 586,305 = 0

To determine NPV:

Formula: NPV = [CF1/(1+i)1 + CF2/(1+i)2 +……+ CFn/(1+i)n] – Initial cost outlay

Time Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Line (n)
Ini. cash- (150,000

outlay )
V.C (804,907.3 - (821,005.45 (837,425.56 (854,174.07

) ) ) )
D.F.C (249,000) (249,000 (249,000) (249,000) (249,000)

)
Revenue 716,602.5 586,305 1,433,198.3 1,498,343.6 1,563,489

s 3
T.cash (150,000 (337,304.8 337,304. 363,192.8 411,918.1 460,314.9

in(out) ) ) 8

NPV = [(337,304.8)/(1+0.08)1 + 337,304.8/(1+0.08)2 + 363,192.8/(1+0.08)3 + 411,918.1/

(1+0.08)4 + 460,314.9/(1+0.08)5 ] – 150,000 = 731,234.1 $

 +NPV means the rate of return from the investment is higher than the required rate

of return. Thus the PV of cash flows is greater than the initial cash out lay. Therefore

the investment is acceptable.

To Determine IRR (Using try and error method):

Formula: IRR = Lower Rate + [NPV @LR/ (NPV@LR – NPV@HR) * (HR – LR)

Let’s take two guessed rates of 8% and 70%

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

NPV at 8% = 731,234.1$

NPV at 70% = [(337,304.8)/ (1+0.7) 1 + 337,304.8/ (1+0.7)2 + 363,192.8/ (1+0.7)3 +

411,918.1/ (1+0.7)4 + 460,314.9/ (1+0.7)5] – 150,000 = - 76,036.3$

IRR = 8% + [731,234.1/ (731,234.1 – (- 76,036.3))]*[70 – 8] = 64.16%

+IRR means a project or investment is expected to return some value to the organization.

Decision: The IRR decision rule states that if IRR is greater or equal to the company’s

required rate of return, the investment is accepted.

Since the 64.16% IRR is greater than the company’s rate of return which is 10% and that of

the cost of capital also which is 8%, we accept the project.

The management do support the project because it have a breakeven point which is only in

two years, it has a positive NPV value and the IRR is very much higher than that of the cost

of capital and that of the rate of return set by the company. The analyses of the decision

through NPV and IRR is supported because it takes under consideration the concept of time

value of money which states that money today is better than money tomorrow. The

calculation is made based on taking all the estimated future cash flows to the present (time 0)

and comparing the results with the initial cash out lay.

Factors that should have been considered in the management’s decision beside the

quantitative factors are:

a. There should have been consideration of adjustments for inflation (if there is one) to

match the required rate of return

b. Should have been considered the qualitative factors like political factors, corporate

culture, environmental impact, strategic factors and so on.

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

Part 3

To determine whether to drop or keep the washer-dryer combination product

Product line differential analysis for a global washer and dryer manufacturer:

PANEL A: Alternative 1 (keep all product lines)

Economical
High-End Set W/D Combo Total
Set
Sales Revenue $4,700,000 $4,060,000 $880,000 $9,640,000
Labor $(1,250,000) $(1,015,000) $(235,000) $(2,500,000)
Materials $(1,885,000) $(1,220,000) $(315,000) $(3,420,000)
T. variable cost $(3,135,000) $(2,235,000) $(550,000) $(5,920,000)
Contri. Margin $1,565,000 $1,825,000 $330,000 $3,720,000
Direct fixed
$(325,000) $(220,000) $(250,000) $(795,000)
cost
Allocated F.C $(650,000) $(650,000) $(650,000) $(1,950,000)
Net Income $590,000 $955,000 $(570,000) $975,000

PANEL B: Alternative 2 (Drop the W/D combo line)

High-End Set Economical Set Total

Sales Revenue $4,700,000 $4,060,000 $8,760,000
Labor $(1,250,000) $(1,015,000) $(2,265,000)
Materials $(1,885,000) $(1,220,000) $(3,105,000)
T. variable cost $(3,135,000) $(2,235,000) $(5,370,000)
Contri. Margin $1,565,000 $1,825,000 $3,390,000
Direct fixed cost $(325,000) $(220,000) $(545,000)
Allocated F.C $(1,046,232.88) $(903,767.12) $(1,950,000)
Net Income $193,767.12 $701,232.88 $895,000

PANEL C: Differential Analysis

Alternative 1 Alternative 2 Differential Alternative 1 is

Total (keep all Total (drop the amount

product lines; W/D combo

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

Panel A) line; Panel B)

Sales Revenue $9,640,000 $8,760,000 $880,000 Higher
Labor $(2,500,000) $(2,265,000) $(235,000) Higher
Materials $(3,420,000) $(3,105,000) $(315,000) Higher
T. variable cost $(5,920,000) $(5,370,000) $(550,000) Higher
Contri. Margin $3,720,000 $3,390,000 $330,000 Higher
Direct fixed $(545,000) $(250,000) Higher
$(795,000)
cost
Allocated F.C $(1,950,000) $(1,950,000) $0 -
Net Income $975,000 $895,000 $80,000 Higher

Allocation of costs based on sales ratio

Allocated fixed costs of High end set = (4,700,000/8,760,000) * 1,950,000 = 1,046,232.88$

Allocated fixed cost of Economic set = (4,060,000/8,760,000) * 1,950,000 = 903,767.12$

The differential amount column in panel C indicates that the company would be better off

continuing with all the three product lines. That means keep the W/D combination product

line.

To explain why we shouldn’t drop the W/D combo line:

Sales Revenue Lost $(880,000)

Variable Cost Eliminated $550,000
Contribution margin Eliminated $(330,000)
Direct Fixed Cost Eliminated $250,000
Loss From Dropping Product Line $(80,000)

The figure shows that the company will lose sales revenue of 80,000 if it drops the W/D

combo product line. However, it saves variable cost of 550,000$ and direct fixed cost of

250,000$ if it drops the W/D combo product line. Because the 800,000$ in cost saving is not

enough to make up for the 880,000$ sales in revenue, profit will decline by 80,000$.

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

The cost methodology for allocating indirect fixed costs is not appropriate because it assigned

the same amount to the three product lines. In addition, that can be true because the nature,

volume and sales of all the product lines is different and as such the costs allocated to them

should be different.

I recommend for the company to allocate its allocated fixed cost using Activity based costing

method. This is a more time consuming method but also a more accurate method for

allocating indirect fixed costs.

Reference

a. Break Even Analysis - Learn How to Calculate the Break Even Point. (n.d.).

Retrieved December 2, 2019, from

https://corporatefinanceinstitute.com/resources/knowledge/modeling/break-even-

analysis/.

b. Business Jargons. (n.d.). Product line. Retrieved from:

https://businessjargons.com/product-line.html

c. CFI. (n.d.). Net present value. Retrieved from:

https://corporatefinanceinstitute.com/resources/knowledge/valuation/net-present-

value-npv/

d. Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Retrieved from

https://2012books.lardbucket.org/books/accounting-for-managers/index.html

e. Investinganswers. (2019, October 1). Internal rate of return. Retrieved from:

https://investinganswers.com/dictionary/i/internal-rate-return-irr

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FINANCIAL ANALYSIS FOR WASHER DRYER MANUFACTURER

f. Investopedia Staff. ( 2019, July 1). What is contribution margin? Retrieved from:

https://www.investopedia.com/terms/c/contributionmargin.asp

g. Mitchell, C. (2019, November 18). Breakeven Point (BEP). Retrieved December 3,

2019, from https://www.investopedia.com/terms/b/breakevenpoint.asp.

h. Xplaind. (n.d.). Differential Analysis. Retrieved from:

https://xplaind.com/478812/differential-analysis

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