In contemporary society, humans are becoming aware of the dangers of drinking impure water. People now understand the fatal effects of drinking or using uncleaned water. This has led to the need for filtered water that is safe for use. In lieu of this, a business manufacturing a water-filtration system is presented. Some of the objectives of the water-filtration system product are as follows:
- To remove chlorine and other bacterial contaminants so as to provide water that tastes and smells better and that is safe for drinking for consumers.
Accomplishment of this objective is threatened by the difficulty and the high cost of bacterial control. It is expected that some customers will be reluctant in purchasing the product because of the relatively higher cost accompanying the same as compared to purchasing bottled water form retail or wholesale outlets. Previously, chlorine was added to water for purification purposes. However, the introduction of strict health and safety as well as environmental and chemical laws have resulted in many businesses abandoning cheap alternatives such as chlorine. A common practice is currently the use of ultraviolet bacterial disinfectants that are more expensive than chlorine. The high cost incurred in the production process will be transferred to consumers who will ultimately pay relatively higher prices for the product than readily available bottled water.
- To provide clean water without having to spend much in purchasing bottled water sold by established companies interested in raking in huge profits.
A major issue affecting the accomplishment of this objective is loyalty and confidence in bottled water sold by renowned companies. It might be an uphill task to draw customers who trust and have confidence in bottled water and convince them to purchase and embrace the water-filtration system.
To start production and marketing of the product, money will be required for start-up expenses and purchase of start-up assets. Start-up expenses include legal fees, purchase of stationery, as well as printing and distribution of brochures to market the business and product. The money needed for start-up expenses is as follows.
|Start-Up Requirements||Money Needed|
|Brochures; printing and distribution||$300|
|Total Start-Up Expenses||$900|
Money will also be required for the purchase of start-up assets. Here, cash will be required to support day-to-day operations. For start-up, purchase of long-term assets such as offices and retail stores will be critical. Money needed for the purchase of assets is as follows.
|Start-Up Assets||Money Needed|
|Other Current Assets||$0|
From the tables above, the total money needed for the start-up will be $19,400. The money will be used for start-up expenses and the purchase of start-up assets. Money needed for the startup ($19,400) will be obtained from savings, donations from family and friends, and a business loan from a bank.
In the first month, the production plant and the outlets will be set up implying that no sales activities will be recorded for the first month. Sales will be from two avenues including personal or close contacts and recurring revenue. Sales will be recorded from the second month and expected sales for each year for the first three years are as follows.
|Sales||Year 1||Year 2||Year 3|
Three major items that will make up a large part of the costs or expenses are payroll or labor, utilities, and insurance. The business is a startup, and will only have 3 employees who will be paid a total of $20,000 annually for the first 3 years of operation. This amount may be scaled upwards depending on the annual returns for the business. Total cost or expenses for the first years based on these items are as follows.
|Expenses||Year 1||Year 2||Year 3|
To calculate the break-even point, the total fixed costs of production is divided by the price per unit minus the variable cost for producing the product. The formula is as follows:
Break-even point in units = Fixed Costs/ (Sales Price per Unit-Variable Cost per Unit)
Sales price per unit- variable cost per unit = contribution margin per unit.
Break-even point in units = Fixed Costs/Contribution Margin per Unit
The break-even point points to the total number of units the business must sell to generate revenue enough to cover all expenses.
Total Fixed Costs = 21,500 + 21,500 +21,500
Variable Costs per unit = $150
Sales price per unit = $200
Break-even point= $64,5000/ (200-150)
Break-even point = 1,290 units
From the above estimated figures and calculations, the business must sell at least 1,290 units of the product to cover both the fixed and variable costs. The total number of units can then be translated into sales dollars by multiplying by the total sales price for every unit, which is $200.
1,290 units * $200 = $258,000
This means that the business must sell an equivalent of $258,000 in sales before realizing any profits or breaking even.