Assignment 1 - Managing Finance, Resources

Topics: Time, Cost, Finance Pages: 5 (1833 words) Published: February 23, 2010
New Business Scenario
Business idea
I have looked at several business options, such as subcontracting, selling the patents for the products and creating a business to manufacture the products myself. Although the risk would greater, establishing my own business to manufacture the products would mean higher financial rewards and greater control of my current range of products, plus any future designs. Cost Model

In order to agree a price with my customer, I needed to construct a cost model to ensure that all my costs were covered and that I could achieve my target profit. This can be seen in _APPENDIX _1. In order to manufacture the products, the business will need a combination of costs that can be categorised as ‘Direct costs’ (costs that increase or decrease in relation to the number of units produced) i.e. materials & labour. Other costs are referred to as ‘Indirect costs’ (costs that the business has to pay regardless of how many units are produced). In the case of direct costs, allocating them to a single unit is much simpler as the required resource (materials or labour) is clearly definable. The direct cost of producing a single unit remains the same regardless of how many units are produced. However, although labour costs are commonly recognised as direct costs, certain commentators argue that this is not the case as it is difficult to increase or decrease an employees working hours in line with the number of units produced. Indirect costs have a totally different impact on a single unit. These are costs that are born by the company in its daily running and will usually relate to support areas of the business and will not fluctuate with unit quantity i.e. administration, expenses and rental of premises to name but a few. There are a number of ways that businesses allocate these costs to a unit but at present the most commonly used method is Absorption Based Costing whereby the costs are divided across the units produced using a common cost driver (these can be man hours or machine hours depending on the nature of business activity). This involves dividing the total number of hours in the business for the chosen cost driver and then applying the calculated rate to the number of hours required to produce one unit. {draw:frame} Material cost per unit (direct cost)

Indirect costs per unit (indirect cost)
3. Selling price
The detailed breakdown of the unit costs can be seen in the appendices. The selling price has been determined by the cost per unit of each product plus a 10% mark up. I have researched lingerie specialists to review market prices for standard products to ensure the cost of the product is competitive. At this level of mark up, the product is competitive in line with other similar manufacturers although it could be deemed as a specialist item. The profit made from the 10% mark up will be used to facilitate the future strategy of the company. So we can invest in a larger factory, purchase operating assets, keep credit terms to a minimum, maintain a reserve for any unconsidered future eventualities and strengthen the business value. The selling price that I have currently applied to my products has been designed to ensure that I am competitive as a new market entry. Although my products appeal to a niche in the market if it is too expensive the consumer will continue to do what they have done in the past and my business venture will fail. As the product grows momentum and my business becomes established my selling price will be based on other considerations. My experience and future outlook will allow me to plan a strategy that considers product demand and allows possible expansion, process development, property investment and research & development into new products. As time goes by, my selling price will be designed to reflect the strategy I adopt for my company. Budget

In order to get a clear view of cash movement within the business and to plan my future...
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