2 year plan
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Table of Contents
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Introduction
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3
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Organization
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5
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Industry Analysis
Exhibit 1: Sales
Exhibit 2: GDP
Exhibit 3: Net Income
Exhibit 4: Return on Assets
Exhibit 5: Return on Equity
Exhibit 6: Stock Price
Exhibit 7: Stock Market Index
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9
9
10
10
11
12
13
14
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Objectives
Exhibit 8:Performance Targets
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15
17
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Strategies
Exhibit 9:Sales Force Management
Exhibit 10:Advertising
Expenditures
Exhibit 11:Product Pricing
Exhibit 12:Salaries and
Commissions for Salespeople
Exhibit 13:Planned R&D
Spending
Exhibit 14:New Product Production
Schedule
Exhibit 15:Planned Expenditures on
Training of New and Existing Employees
Exhibit 16:Executive and
Administrative Personnel Costs for Operating Plants
and Sales Offices
Exhibit 17:Production Line
Operations and Related Expenses
Exhibit 18:Inventory Control and
Storage Costs
Exhibit 19:Product Units Shipped
to Sales Office
Exhibit 20:Product Units Shipped
to Customers
Exhibit 21:Total Transportation
Costs
Exhibit 22:Bank Loans Needed (in
000s)
Exhibit 23:Investment in
Certificates of Deposits (in $000s)
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18
19
19
20
21
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22
22
23
25
26
26
26
27
27
28
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Forecast
Exhibit 24:Company Sales Forecasts
in Units (000s)
Exhibit 25:Company Sales Forecasts
in Revenue ($ or Rp 000s)
Exhibit 26:Industry Sales
Forecasts in Units (000s)
Exhibit 27:Industry Sales
Forecasts in Sales Revenue ($ or Rp 000s)
Exhibit 28:Market Shares as % of
Industry Sales by Sales Revenue
Exhibit 29:Forecasting Regression
Results for Industry Sales by Market Area
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29
30
31
31
32
32
33
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Production Plan
Exhibit 30:Product Supply and
Distribution to Individual Market Areas
Exhibit 31:Unit Labor Costs of
Production
Exhibit 32:Unit Material Costs of
Production
Exhibit 33:Total and Unit
Production Costs
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42
45
45
45
46
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Financial Statements
Income Statements
Cash Flows Statements
Balance Sheets
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47
48
53
58
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Introduction:
A Brief History
In 2007, while working at a high-end
company in San Francisco, Kirsten Hueck was inspired to start a company that
offered high-end quality products at reasonable prices. Hueck would constantly
hear customers complain about how they loved the quality of the product but
could not afford it. By the end of 2007, Hueck returned to Los Angeles with
eagerness to share her idea and find investors. She reunited with Karla
Gonzalez, a long-time friend who worked as an investment banker. Because
Gonzalez had a background in start-up companies, Hueck knew it would be in her
favor to pitch her idea to Gonzalez. In 2009, the two opened up the first store
in Los Angeles.
From the start, Hueck’s approach to
business was to offer exceptional service, selection, quality and value. The
idea resonated with the devoted customer base the company had acquired, and in
2011, the partners added a second store. Five successful years led the partners
to decide it was time for The Spice Girl’s, Inc. to go public; a move that
proved to be wise three years later when annual sales surpassed $14 million. Within its industry, Spice Girl’s,
Inc. held an average of 19.88% of the
market share.
Although the company had a rough
quarter recently, Hueck, along with an executive team, are working relentlessly
to fix the problem and continue giving consumers a captivating shopping
experience. This report was prepared as a two-year plan to ensure that The
Spice Girls, Inc. is better prepared for the years to come. First, a brief
overview of the organization and its members will be provided. Then, an
industry analysis was prepared to compare the position and performance of The
Spice Girls, Inc. in comparison to its top four rivals. Trends were studied in
the analysis in efforts to better understand factors such as ROA, ROE, stock
prices, etc. following the analysis, the objectives of The Spice Girls, Inc.
are provided along with performance goals for the future of the company. To
achieve these goals we will explain our competitive strategy and how it is
unique to our firm as well as our strategies for marketing, operations, and
finance. In order to test our strategies, sales forecasts and a production plan
were developed. Using the forecasted sales and production plans, pro forma
financial statements were prepared to show the company’s standing in the years
to come based on our two year plan.
Organization
❖ Kirsten
Hueck - Chief Executive Officer
Hueck knew she was meant to be in
the world of business at the age of nine when she started selling chewing gum
to her classmates. She easily understood supply and demand and was able to put
her passion for success to use by founding The Spice Girls, Inc. As CEO, she
serves as the interface between internal operations and other stakeholders. Her
duties include: to determine and communicate the company’s strategic direction,
to balance resources for and provide initiatives for the company’s goals, to
oversee and deliver company 
performance, and to allocate capital
to company priorities.
❖ Karla
Gonzalez - Chief Financial Officer
Gonzalez had always been savvy with
her finances. She knew well enough to not purchase the overpriced gum that
Hueck would sell, but would sometimes cave in to cravings. Having learned her
lesson, she started to compete with Hueck becoming her first business rival.
These experiences helped to mold her to be the successful CFO she is today. Her
duties include: working with senior leaders on strategic vision of the company,
preparing and communicating monthly financial statements, providing timely and
accurate analysis of budgets, financial reports, and financial forecasts,
leading and coordinating a financial planning process which includes inputs,
from sales, product, and operational expenses. 
❖ Lorena
Albarran and Stephanie Hamilton - Accountants
Stephanie and Lorena met while in a
study program for their CPA licenses. When Stephanie heard that Hueck was
starting her own business, she got in touch with Hueck and brought Lorena on board to head the
accounting department at The Spice Girls, Inc. Together, they: document
financial transactions by entering account information, summarize current financial
status by collecting information by preparing a balance sheet, profit and loss
statements, maintaining accounting controls by preparing and recommending
policies and procedures, assisting with reviewing of expenses and payroll
records, administering accounts receivable and accounts payable, assisting in
preparing budgets and forecasts.
❖
Gabriella Murillo - Head of Marketing
Hueck met Murillo when Murillo used
her wit and marketing skills to sell Hueck the one thing that no one had ever
been able to convince her of: a gym membership. Because of this experience,
Hueck knew there was no better option for marketing than Murillo so she offered
her a deal which Murillo could not refuse. As Head of Marketing, her duties include: providing short-term and
long-term issues that must be addressed when applying them towards competition,
obtaining market share by developing market plans and programs for each product
that obtained promotional support from customers, providing short-term and
long-term market forecasts and reports by directing market research collection
and market data, providing new uses for existing products by overseeing
statistics and market development, continuing research by assembling market
information.
❖
Cynthia Valadez - Vice President of Production
From very early on, Cynthia liked
making things and putting things together. As a child, Lego's were her go to
toy. She would regularly spend hours arranging the blocks into different
creations. Needless to say, she enjoyed seeing the results of her labor in
finished products. When she heard that Hueck was looking for someone to join
the production team at Spice Girls, Inc, she knew that she'd fit right in. As
VP of Production, her duties include: developing plans and establishing
procedures to uphold high quality standards in manufacturing operations,
overseeing production, ensuring the efficiency and cost effectiveness of
production operations, estimating costs and setting quality standards,
adjusting and processing the scheduling of labor and overall production.
❖ Michelle
Zhang - Management
Michelle always liked telling people
what to do. In fact, she was an excellent delegator and was extremely
organized. In college, her favorite subject was Management. For this reason,
when a manager position became available at Spice Girls, Inc, she applied for
the role with no hesitation. Her duties as a manager include: overseeing
employees in factories and ensuring they remain focused, scheduling employees
to meet demands of production, making sure facilities are operating at full
capacity, ensuring that the employees’ goals align with those outlined in the
company mission statement.
Industry
Analysis
Exhibit
1
To conduct our industry analysis, we
compared sales, net income, return on assets, and return on equity in order to
determine the strength of our company. Factors such as seasonality and Gross
Domestic Product (GDP) were also analyzed because they affect sales.
Exhibit 1 shows us that all five
companies have had a similar upward trend in sales. Though sales have generally
been increasing in the past eight quarters there has been some minor decline.
For instance, our company along with companies 3 and 5 had a decrease in sales
in quarter three of year three (Y3Q3). There are many different factors that
could have contributed to this noticeable decrease in sales. Some of these
factors include changes caused by seasonal factors and/or changes in GDP. The
GDP graph below (Exhibit 2) shows us
that GDP decreased in Y3Q3. A decrease in GDP causes prices to increase which
then results in inflation increasing.
The overall outcome is consumers purchasing less as can be observed in
the sales graph above. After Y3Q3, GDP begins to have an upward trend which
correlates with the sales trend, as GDP rises consumers spend more. Seasonal
factors also contribute to the increase in sales in quarter two (tax season)
and quarter four (holiday season). When compared to the other companies in the
industry our company currently holds third place in sales.
Exhibit 2
Exhibit
3
Net income is a company’s total
profit after subtracting all of their expenses. The graph above (Exhibit 3) shows us the net income of
the five different companies within our same industry. As shown above, every
company’s net income has been fluctuating for the past eight quarters. The
fluctuation can be due to different expenses such as operational expenses,
administrative, and general expenses. Four companies including our own had a
drop in net income in year four quarter one (Y4Q1) which can be correlated to
investment in opening new production lines. Our company’s decrease in net
income in Y4Q1 was due to opening up a new plant in Merica-2. Although we had a
minor increase after Y4Q1 our company’s net income continued dropping the
following quarters. Due to calculation errors, we were unaware that we did not
have enough cash to support all of our investments which lead to us receiving a
large bank loan in Y4Q3. This deficit of cash effected in our company currently
having negative net income of -$448 (in millions), placing our standing far
below the rest of the companies who have a positive net income.
Exhibit 4
Return on assets (ROA) gives us an
idea of how companies are effectively converting their assets into revenue.
When a company receives a high ROA it’s a sign that the company is able receive
the maximum value their assets have to offer. The ROA graph above (Exhibit 4) shows us how ROA has been
fluctuating with each company throughout the eight quarters. All of the
companies had a decrease in ROA in year four quarter one but managed to
increase their ROA in the following quarters. On the other hand, our company’s
ROA continued to drop. Our company’s goal to increase inventory resulted in the
company overinvesting in assets which then lead to our negative net income. In
order to increase our company’s ROA we will have to reduce any expenses and
asset costs. Some asset costs that we would have to make sure to get rid of is
any overcapacity of inventory. Overcapacity of inventory takes up storage space
and increases asset costs without making any revenue.
Exhibit 5
Return
on equity (ROE) measures how a company can efficiently generate profit with
each dollar of shareholder’s equity. ROE correlates with Net Income, if net
income is negative so is ROE which is why the net income graph and the ROE
graph are similar (see Exhibits 3 and 5).
Our drastic decline in net income resulted in ROE taking a decline of equal
severity. It is imperative for our company's success to increase net income
which will show that our company is effectively using shareholder funding.
Exhibit 6
For the past eight quarters the stock price for the five
company’s been increasing (see Exhibit 6).
There are a variety of factors that can cause the stock price to either
increase or decrease. An increase in stock price is due to investors wanting to
continue purchasing that stock rather than selling it. Another reason why the
stock price may increase is if a company releases a new product and it receives
positive reactions from consumers. However, the most important indicator of the
stock price either going up or down is the company’s earnings. All five
companies in the industry had a stock price increase in the first four quarters
but then had a drop in year four quarter 1 (Y4Q1). The reason all five
companies had a stock price decrease in Y4Q1 is because their net income
dropped from the previous quarter. Some companies went from having a positive
net income in Y3Q4 to having a negative one the following quarter. Our company
for example had a net income of $209 (in millions) in Y3Q4 to a negative net
income of $64,000 in Y4Q1. The stock market index graph below (see Exhibit 7) also shows us how steep the
drop in the stock prices were that quarter. Both graphs then show us how the
stock market recovered the following quarters with a rising increase in stock
price. While all the companies in the industry had a rising stock price, our
company’s stock price began decreasing in Y4Q4. Our company had a slight drop
because once again we received a negative net income of -$448 (in millions) due
to bad investing. With the huge decrease in net income our company also
received a bank loan in Q4 of year four.
Exhibit 7
Objectives
Criteria Weighting Factors
Our initial
thoughts when choosing our preliminary weighting factors were to make our
choices based on our strategy of product differentiation assuming that this
strategy would give us a high net income; thus we placed a 25% weight on total
net income. Factors that are affected by net income are ROA and ROE which is
why we placed a weight of 30% on ROA and 20% on ROE. We assumed that a high net
income would cause investors to buy our stock which in turn would effect in the
price of our stock going up. A 15% weight was placed on stock price because of
this assumption. Because of the competitiveness and fluctuations in the
industry, we placed a weight of only 10% on market share. No weight was placed
on unit production cost since our high end product was bound to have higher
costs.
We monitored
our company for the first three quarters of year three and decided to make
changes based on those results, keeping our initial goals in mind. Our net income fluctuated but on average we
earned a net income of $239k per quarter. We decided to lower our initial
weight of 25% to 15% because of the fluctuations and uncertainties of the
future. ROA averaged 1.5 which we felt was strong and safe enough to maintain
our initial weight of 30%. ROE averaged 1.9 which was higher than we had
expected so we added 5% weight for a total of 25%. Our stock price had a sudden
increase from $0.79 in the first and second quarter to $1.01 in the third
quarter. We felt confident that our stock price would continue to increase and
so we added to the initial weight for a final weight of 20%. Our market share
was relatively unchanged for the three quarters averaging at 20.5% of the
market per quarter. We determined it would be of more benefit to further reduce
our initial 10% weight to 5% and instead allocate the 5% as previously
mentioned to other factors. Finally, our unit production cost though it was
also subject to random fluctuations, we decided to place a low weight of 5%.
Our reasoning was that we would plan to allocate money to training and R&D
in order to reduce costs of production and to influence productivity. Based on
the criteria above, Exhibit 8
presents performance targets we plan to achieve for years 5 and 6.
Exhibit 8
Strategies
Our mission is to provide our customers
with the highest quality product made possible from our highly skilled
employees, at a feasible price. We take pride in our products by focusing on
research and development to provide the best and most innovative features in
the market. We strive to grow our business with the same honesty and integrity
we use to build our products. Overall, our goal is to strive for customer
satisfaction, and always work efficiently and effectively.
Our
business vision is to be the leader in our industry through dedication and
model innovations. We want to have the highest level of technological knowledge
in the industry. In the future, we want to build long-term relationships with
our suppliers, customers, and reward our highly skilled employees. We will
strive in providing the best quality products exceeding our customer’s
expectations.
Marketing
For our company’s target segments,
we are primarily focusing on Merica 1, since it is our area with the highest
demand in sales. We are introducing a new model, model 4, in Year 6 quarter 1.
However, before the introduction of the new model we plan on purchasing the
marketing research report to obtain information about consumers and
competitors. We realize that the cost of the marketing research report will be
a good investment because it will help us understand more about our consumers
wants and needs from our products. It is also very important for us to have a
heavy focus on marketing because our pricing strategy is differentiation based
on our high quality levels and features. All of our models are quality level
three along with level three features because our target consumer is looking
for a high-quality product with a feasible price.
Sales Force Management
Exhibit 9
Advertising
Expenditures
Exhibit
10
As can be seen in Exhibit 10 above, we plan on increasing
advertising expense by $1,000 per each quarter in Year 5. In Year 6, we will
begin by increasing advertising by $2,000 in the first quarter then an increase
of $1,000 per subsequent quarter. We plan on increasing our advertising expense
because we understand the importance that advertising has on our product. If we
put a greater focus on advertising we believe this will lead to an increase in
sales because more consumers will be aware of our product and will want to
purchase from us.
Product Pricing
Exhibit
11
We are planning on steadily increasing
our prices throughout the next two years. In year 5 quarter 1 we will start
with the price of $11.90 in Merica 1 and increase our prices by $0.15 in
quarter 2. We plan on increasing the price all of our products by $0.15 each
quarter in year 5. However, in year 6, our lowest price will start at $14.00
and will increase by $0.25 in quarters 2 and 4. In quarter 3, there will be a
$0.15 increase. We plan on increasing our prices in year 6 because we will be
introducing a new model in the first quarter. We believe that our prices are
priced fairly in regards to the quality of our products and based on how much
our customers are willing to pay.
Salaries and Commissions for Salespeople
Exhibit 12
Exhibit 12 depicts the salaries and
commission for our company's sales team. It shows that we plan on increasing
salaries with the new model in year 6 quarter 1 by $13,000 to boost morale. We
provide employees with commission, increasing gradually beginning Year 5
Quarter 1 throughout the end of Year 6 for all areas.
Planned R&D Spending
Exhibit 13
R&D expenses will be increased
by $2,000 each quarter starting in year 5 quarter 1. We believe that if we
focus on research and development, we will be able to provide a better, more
innovative product.
New Product Production Schedule
Exhibit
14
Exhibit
14 shows our plans for the product
model and quality we plan to produce. Because our strategy is product
differentiation, we will be producing only quality level 3 and feature level 3
products. As mentioned before, we will be producing model 4 starting in quarter
1 of year 6.
Planned
Expenditures on Training of New and Existing Employees
Exhibit
15
Exhibit
15 shows how we have planned the
training expenses of our salespeople. Included are ongoing training costs for
current employees as well as training costs for new employees. We put emphasis
on training so that our salespeople as knowledgeable as possible of the quality
and features of our products so that they may better serve our customers when
making decisions. We have planned to hire and train more salespeople in certain
periods to prepare for peak sales.
Executive
and Administrative Personnel Costs for Operating Plants and Sales Offices
Exhibit
16
The executive compensation will
increase by $1,000 in year 5 quarter 1 in Merica 1 because that area has the
best sales. We believe the sales in Merica 1 has to do with the fact that our
executives enjoy their job and the pay that comes with it. In Merica 2, we are
planning on decreasing the executive compensation substantially because that is
the location where we are closing down the plant.
Operations
Exhibit 17 depicts the operation planning that we for our production
lines. Starting year 5 and all of year 6 we are still going to have all eight
1st shift line open, all operating 40 hours at full capacity. Year 5 quarter 1
is the last quarter Merica 2 will be functioning, it will be closed down. In
Merica’s 2 last quarter it is scheduled for employees to work 40 hours shifts.
As we
proceed in year 6 we introduce a new model and our strategy is to offer a
second shift to increase production units.
As shown in the table, we offered 4 second shift lines in year 6 quarter
1, and one second shift line in year 6 quarter 2. The motive in increasing
sales force size by a bit is to increase units in production, specifically the
quarter we introduce the new model. In year 5 quarter 4 we go from 416 units of
production to 624 units in year 6 quarter 1.
Production
Line Operations and Related Expenses
Exhibit 17
To be able to reduce storage costs
we have to liquidate all excess inventory in year 5 quarter 4. As we see in Exhibit 18 in Y6Q4 beginning inventory
is at 407 and there is a drastic drop to 14 in Y6Q1, due to the introduction of
the new model and old inventory liquidating. If we look at year 6 storage
expenses, we see these amounts are relatively lower than year 5. This is in
correlation with having less inventory to reduce our costs.
Inventory
Control and Storage Costs
Exhibit
18
Product Units Shipped to Sales
Office
Exhibit
19
Product Units Shipped to Customers
Exhibit
20
Total Transportation Costs
Exhibit
21
Finance
The company’s primary goal is to pay
back our loan balance completely, to save money on the interest that have been
accruing throughout the quarters. How we plan on achieving this is by closing
down one of our plants and getting back 90% book value back in the current
quarter and using that money to repay the loan. Closing down the plant will
reduce inventory cost, labor costs, storage expense, depreciation expense, and
other various costs associated with a plant manufacturing products.
Bank Loans Needed (in 000s)
Exhibit
22
As shown in Exhibit 22, by the beginning of year 5
quarter 2 the outstanding loan balance will be completely paid back and there
will not be any additional loans taken out for the rest of year 5 and all of
year 6.
Another
strategy we have planned is to invest in Certificates of Deposits (CDs). We
have decided that this type of investment is a good as a funding source to
generate cash quickly for the company. We have used this technique in previous
years and it has been achieved. We therefore, are considering implementing this
strategy back into our company.
Investment
in Certificates of Deposits (in $000s)
Exhibit
23
The table above shows that the
planned purchase of CDs will occur in
year 5 quarter 3 , year 5 quarter 4, year 6 quarter 3, and lastly in year 6
quarter 4 each by the amount of 1000. Keep in mind the amount given is in
thousands (000s).
Forecast
Techniques
and Assumptions
Sales forecasts for Y5Q1 to Y6Q4
were estimated utilizing historical data from Y1 to Y2 and quarterly data from
Y3Q1 to Y4Q4. Forecasting models were generated based on regressions in which SA Sales (seasonally adjusted industry
sales) were considered the dependent variable. Distinct explanatory variables
were evaluated in various combinations to determine the model that best fit the
data. Among these variables are Time
(a time trend index that measures the impact of social and demographic trends
on product demand), Real GDP
(reflection of the economy’s effect on product sales), and Avg. Price (the industry’s average product price in the respective
market area). The coefficients of each model were estimated using regression
analysis performed in Excel. Additionally, due to fluctuations in the economy,
different forecasting models were estimated for each market area until the most
appropriate model was selected. To obtain the Industry Sales Forecast, the
regression results were multiplied by a seasonal index to add seasonality back
to sales demand. The Company Sales Forecast was then calculated by multiplying
the Industry Sales Forecast by Expected Market Share. This Expected Market
Share is based on assumptions of changes in future prices, marketing, model production,
and competitors’ actions.
The best forecasting model for each
market area was selected based on three statistical measures. These measures
include R-Square, Coefficient Estimates, and Adjusted R-Square. The R-Square
value demonstrates the proportion of sales variation (dependent variable)
explained by the regression model. Therefore, a higher R-Square value is
preferable. Furthermore, the coefficient estimates for the selected model had
to be statistically significant and have appropriate signs. In other words, the
coefficient estimates for Real GDP
and Time had to be positive and the
coefficient estimate for Avg. Price
had to be negative. The signs of these coefficients reflect generally accepted
assumptions. The first assumption is that as Real GDP increases, sales also increase in tandem with increases in
production and economic growth. The next assumption is that the change in
demand due to social and demographic trends or Time results in increased sales. The final assumption is that as Avg. Price increases, as per the law of
demand, demand decreases as well. Consequently, sales would also decrease.
Ultimately, among the models with the correct signs, the best model was
selected using the Adjusted R-Square. The Adjusted R-Square takes into account
the number of explanatory variables in the model and determines whether they
fit the model.
The
following charts exhibit the sales forecasts in units and revenue for both the
company and the industry in each market area.
Company Sales Forecasts in Units
(000s)
Exhibit 24
Company Sales Forecasts in Revenue ($ or Rp 000s) 
Exhibit 25
Industry Sales Forecasts in Units (000s)
Exhibit 26
Industry Sales Forecasts in Sales Revenue ($ or Rp
000s)
Exhibit 27
Market Shares as % of Industry Sales by Sales Revenue
Exhibit 28
Forecasting Regression Results for Industry Sales by Market
Area
Exhibit
29
Based on the statistical measures of
the regression analysis, the best forecasting model for each of the market
areas was one in which the Time
variable was used as the sole explanatory variable. As evidenced by the
coefficients of determination demonstrated above, the selected forecasting
models exhibit a strong association between variation in sales and changes in
demand due to social/demographic trends. In each of the models, a coefficient
of determination above 90% is observed.
Sales
Forecast Worksheets
Production
Plan
Production Scheduling (For Y5Q1 -
Y6Q4)
Having suffered excessive losses due
to miscalculations, for years five and six we have carefully prepared plans for
production, calculated future labor and material costs to estimate product cost
per unit, and arranged a product supply and distribution chart (see Exhibits
30-33). In the past, we operated under the assumption that it was best to
overproduce in order to avoid stockouts. Producing under this assumption has
not been effective for our company. Therefore, for the next two years (Y5Q1 -
Y6Q4), we have decided to alter our strategy and instead produce only enough product to meet demand.
Through the implementation of this tactic, expenses are expected to be reduced.
This strategy should also aid in the maximization of profits. The production
schedule displayed on the previous page outlines the amount of units we plan to
produce for each of the following quarters as well as the planned hours of
labor for our employees. The company aims to remain at normal capacity
throughout the majority of the next two years since operating at normal
capacity produces the appropriate amount of units needed to meet demand. Second
shifts are scheduled only in the first two quarters of Year 6 to make up for
the liquidation of Model 3 in the last quarter of Year 5.
Production and Inventory Management (000s units)
Product Supply and Distribution to Individual Market Areas
(in 000s units)
Exhibit 30
Unit Labor Costs of Production
Exhibit 31
Unit Material Costs of Production
Exhibit 32
Total and Unit Production Costs
Exhibit 33
Calculations of unit labor costs of
production as well as of unit material costs of production (see Exhibit 31 and
32) were made in order to estimate the total costs of production for Year 5 and
Year 6 . Factors including inflation and a 10% adjustment for quality and
features were taken into account when preparing these schedules. Using the
labor and material cost production schedules displayed in this section, a
schedule was prepared for the total costs of production per unit (Exhibit 33).
Depreciation costs, which were calculated using the straight-line depreciation
method, were included as well as maintenance costs for equipment. It can be
estimated that the overall costs per unit will generally increase due to the
forecasted rising inflation. Although training and R&D can potentially
lower these costs, it is preferable to utilize these higher expense estimates
to ensure that enough funding is allocated for production.
Financial
Statements
Pro Forma Assumptions:
In order to
prepare the Pro forma statements, the following assumptions were made:
❏ Rounding errors due to currency
exchange will affect overall totals
❏ Model 4 will begin to sell Quarter 1
of Year 6
❏ Model 4 will be developed with level
3 quality and level 3 features
❏ Prices will increase at 1.3% at all
quarters throughout all sectors with the exception of Year 6 Quarter 1 when
Model 4 is sold
❏ Price will increase by 15% in the
first quarter of year 6
❏ Future income is based on forecasted
sales that are subject to change based on GDP, seasonality, etc
❏ Production hours and wages were
planned assuming no new legislation from Workers Union
❏ Ongoing training of employees will increase
$2000 per quarter
❏ Research and Development will be
increased $2000 quarterly
❏ Advertising will be increased $1000
quarterly
❏ Ongoing training of employees will
increase $2000 per quarter
❏ Salaries will increase by 33% upon
introduction of Model 4
❏ Commission will increase 5%
($0.05/unit) upon introduction of Model 4
❏ Income tax was calculated at 39%
❏ Value added tax was calculated at
10% of Pandau sales
❏ Fixed assets were depreciated
using straight-line method
❏ Cost of goods sold was calculated
using sales volume and cost per unit
❏ Production costs were calculated
expecting full capacity of production lines
❏ All costs were calculated using
inflation multipliers and exchange rates listed below
B
The statements above suggest that
the strategies we plan to enforce will prove to be effective in achieving our
company goals. It is imperative for our company to reduce assets and encourage
efficiency. As demonstrated in the statements, Spice Girls, Inc has the ability
to earn a higher net income while producing with efficiency in Merica 1 and
upon liquid of our excess investments in Merica 2. We had hoped that by
investing in a plant in a different sector we would reduce shipping costs and
have higher sales in the sector of investment. Unfortunately that was not the
case; our investment generated huge losses for our company due to excess inventory,
production costs, salary expenses, etc.
Because our priority is to achieve a
higher net income, we based our performance goals around items that involve net
income. Based on the pro forma statements, it is evident that our goals can be
achieved. To increase our return on assets (ROA), our first move will be to
decrease our assets due to the fact that they incur excess unnecessary expenses
for our company. To increase our net income, we plan on selling our high end
product at a higher price in order to make up for the high costs per unit of
product. We also decided to invest in advertising and research and development
to attract more sales based on a well-developed high quality product. Return on
Equity will be increased as long as we achieve our goals of higher net income. 
Our performance target was $4.5m for
year 5, and based on the pro forma income statement we will achieve a net
income of $5.8m, 30% above our target. In year 6, our goal was $6.5m and we
will exceed that by 37% with a total net income of $8.9m. Our stock price at
the end of year 4 was at $1.19/share due to our negative financial conditions.
We planned for a stock price of $1.30/share for year 5 and we expect to achieve
a price of $1.87/share instead. For year 6 we planned for $1.75/share and
expect a price of $2.29/share. Our only goal that was not satisfied was the
unit production cost per product due to the fact that we are adamant about
selling a high quality high feature product that is expensive to produce.
Further, it is difficult to predict the true price of production because of
factors such as inflation and unexpected surges in prices of materials. All in
all, based on the objectives and strategies that we have proposed we are
certain that our company will be able to end year 6 profitably.
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