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Executive Summary
Introduction
XXXXX Foods is a lentil pasta sauce processor that is located in SK. XXXXX
Foods will have a total of five members sitting on the board of directors which includes
two internal and three external members.
XXXXX Foods will purchase cleaned lentils from a local producer. The lentils
will be cleaned and delivered for processing. They will enter a niche market with a
premium gourmet lentil pasta sauce. The product will then be marketed through Calgary
Coop out of Calgary Alberta, and eventually through Sobeys in both Alberta and
Saskatchewan.
Operations Plan
XXXXX Foods will be located in SK. The primary vehicle access, allows ease
for sourcing product in and out of the facility. The facility is a 3500ft2floorheated,
insulatedbuildingwhichwillberequiredforproductionofthepastasauce.
Theproductionwillbeginwiththelentilsbeingboiledinasteamjacketkettle,
whichwillthenbetransportedintothemixingkettlethatwillcontainthetomatopaste.
Fromtherethesaucewillbeplacedinto750mljars,sealedandshippedtothe
distributors.XXXXXFoodswillbeginproductionat70,000unitsinthefirstyearwhich
willleaveroomforexpansioninthefuture.Themajorityoftheproductionlinewillbe
purchasedfromAlardEquipmentandHandlingInnovations.
HumanResources
XXXXXFoodswillemployatotal7employeesandincreasedto9byyearsix
whenproductionincreases.The plant manager will be responsible for the day to day
operations. The sales manager will be in charge of selling and marketing the product.
They will need to be in contact with distributors and consumers to learn and invent new
ways to market the lentil pasta sauce. The secretary will be involved in the day to day
administration and regular secretarial duties. The plant workers will be in charge of the
processing, filling and shipping/receiving of the lentil pasta sauce production.
Marketing Plan:
XXXXX pasta sauce will be sold in 750 ml glass jars, XXXXX is a lentil
enriched tomato pasta sauce that will appeal to vegetarians and health conscious
individuals within a niche market. The sauce will be produced and packaged at the
XXXXX Foods production facility in SK and shipped to the Sobeys and Federated Coop
Limited (FCL) warehouses in Calgary, AB for distribution.
As the health food industry becomes more health conscious, and vegetarians are
looking for additional meat alternatives, XXXXX will become a greater demand.
XXXXX will be marketed in the health food, specialty food aisle. This offers the product
two advantages, the first being a healthy pasta sauce choice, because of the protein found
in lentils. The second opportunity is the focus towards vegetarians, as a meat
replacement.
The specialty nature of the product allows there to be room for a mark-up in price
in comparison with competing pasta sauces. A reasonable mark-up is 25% above
XXXXX competitors. XXXXX will be strategically priced at $5.88 which is a 25%
markup over main stream sauces. The objective of the marketing strategy is to supply
Calgary FCL and Sobeys stores with XXXXX in year one, expanding to the surrounding
Calgary area in Alberta in year two and three, with a long term goal of supplying the
province of Alberta with XXXXX, While obtaining sales targets of 10% of the total target
market each year, 30% of the target market will be aware of the product by year three.
Awareness of the product will be the primary objective of the XXXXX Foods
marketing team. The Calgary Vegetarian Resource magazine will be used as a main
resource because this magazine has no charge to advertise. In store taste tests will also be
ii
used as well as advertising in fliers, in both the Co-op and Sobeys fliers. XXXXX Foods
are also going to advertise in the Country Women, and Flare magazines, because these
magazines target the main segment of the target audience.
Financial Plan
Ten years of financial projections have been made of XXXXX Foods. All costs
including selling prices, expenses and salaries have been inflated at 2% every year.
Financing will be a mix of debt and equity, but will rely more heavily on equity. A loan
of $115,000 will be taken on representing 30% of the land and building costs and will be
repaid over a 15 year period.
Critical variables involved in the financial analysis are the selling price of
individual jars, the production and sales per year, and the beginning owners equity
investment. These variable all have a huge impact on the level of success experienced by
the company. The selling price has the largest impact on whether the company succeeds
or fails, followed by the production levels.
Given the current market prices for pasta sauce, the base run shows the plan to be
unfeasible. A positive cash flow cannot be sustained without a substantial initial owner
equity investment of $1,625,000. The following break down of the financing budget is
based on the building and land costs, as well as covering the working capital required for
the first year of operations. This represents the absolute minimum investment to operate
for year 1.
Net Present Value of Investment
$-913,535
iii
Conclusion
The base plan will be unfeasible and in order for XXXXX Foods to have a
feasible base run the company will either have to charge more for their product or
increase unit production.
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Table of Contents
Executive Summary..............................................................................................................i
Table of Contents.................................................................................................................v
List of Figures..................................................................................................................viii
List of Tables......................................................................................................................ix
1.0 Operations Plan..............................................................................................................1
1.1 Product Description...................................................................................................1
1.2 Organizational Structure............................................................................................1
1.3 Site Plan.....................................................................................................................2
1.4 Building and floor plans............................................................................................4
1.5 Steps Required for Processing Lentil Sauce..............................................................6
1.5.1 Raw Materials Delivered....................................................................................6
1.5.2 Raw Lentils Weighed..........................................................................................6
1.5.3 First steam jacket kettle......................................................................................7
1.5.4 Ingredients Measured..........................................................................................8
1.5.5 Second Stem Jacket Kettle..................................................................................8
1.5.6 Pumps Transferred Sauce to Filling Machine.....................................................9
1.5.7 First Person Passes Empty Jars...........................................................................9
1.5.8 Semiautomatic Filling Machine........................................................................10
1.5.9 Full jars are Capped..........................................................................................10
1.5.10 Labeling and Packaging..................................................................................10
1.5.11 Finished Product to Storage............................................................................11
1.5.12 Delivery to Warehouses in Calgary................................................................11
1.6 Average Business Cycles.........................................................................................11
1.6.1 Average Business Day......................................................................................12
1.6.2 Average Business Month..................................................................................13
1.7 Quality control.........................................................................................................13
1.7.1 HACCP.............................................................................................................14
1.8 Supply/service analysis............................................................................................14
1.9 Capital Budget.........................................................................................................15
1.10 Cost of Goods Sold................................................................................................15
1.11 Cash Management..................................................................................................18
1.11.1 Inventories......................................................................................................19
1.11.2 Accounts Receivable.......................................................................................19
1.11.3 Accounts Payable............................................................................................20
1.11.4 Cash Conversion Cycle...................................................................................20
2.0 Human Resources Plan................................................................................................21
2.1 Plant (operation) Manager (1):................................................................................21
2.2 Sales Manager (1):...................................................................................................21
2.3 Secretary (1):...........................................................................................................21
2.4 Plant workers...........................................................................................................21
2.5 Training Programs...................................................................................................22
2.6 Compensation..........................................................................................................22
3.0 The Marketing Plan.....................................................................................................24
3.1 Overview..................................................................................................................24
3.2 Marketing Mix (4 Ps).............................................................................................24
3.2.1 Product..............................................................................................................24
3.2.2 Place..................................................................................................................24
3.2.3 Price..................................................................................................................25
3.2.4 Promotion.........................................................................................................25
3.3 Segmentation, Targeting, and Positioning...............................................................25
3.3.1 Segment............................................................................................................25
3.3.2 Target................................................................................................................26
3.3.3 Position.............................................................................................................26
3.4 SWOT Analysis.......................................................................................................26
3.4.1 Internal Strengths..............................................................................................26
3.4.2 Internal Weaknesses..........................................................................................26
3.4.3 External Opportunities......................................................................................27
3.4.4 External Threats................................................................................................27
3.5 Market Analysis.......................................................................................................27
3.5.1 Past Performance..............................................................................................27
3.5.2 Market...............................................................................................................27
3.5.3 Competition......................................................................................................27
3.5.4 Product/Service Features..................................................................................27
3.5.5 Customers.........................................................................................................28
3.5.6 Opportunity.......................................................................................................29
3.6 Marketing Strategy..................................................................................................29
3.6.1 Sales and Profits...............................................................................................29
3.6.2 Select Markets/Product/Service Mix................................................................30
3.7 Selling and Advertising............................................................................................31
3.7.1 Product Placement............................................................................................31
3.7.2 Magazine Advertising.......................................................................................32
3.7.3 Flyers and Coupons..........................................................................................32
3.7.4 Business Cards..................................................................................................32
3.7.5 Taste Tests.........................................................................................................32
3.7.6 Web Page..........................................................................................................32
3.7.7 Travel................................................................................................................33
3.7.8 Freight...............................................................................................................33
4.0 Financial Plan..............................................................................................................34
4.1 Financing.................................................................................................................34
4.2 Balance Sheet...........................................................................................................35
4.3 Economic Forecast...................................................................................................36
4.4 Unit Cost of Production...........................................................................................36
4.5 Financial Performance Analysis..............................................................................37
4.5.1 Critical Variables...............................................................................................37
4.5.2 Risk Analysis....................................................................................................37
4.5.3 Breakeven Analysis..........................................................................................38
4.5.4 Alternative Salary Scenario..............................................................................40
4.5.5 Contingency Plan..............................................................................................41
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4.6 Conclusion...............................................................................................................41
5.0 References....................................................................................................................42
6.0 Appendix A..................................................................................................................43
7.0 Appendix B..................................................................................................................45
vii
List of Figures
Figure 1.1 Organizational Structure for XXXXX Foods...............................................2
Figure 1.2 Site Plan............................................................................................................3
Figure 1.3 Floor Plan.........................................................................................................4
Figure 1.4 Flow of Production..........................................................................................5
Figure 1.5 200kg Scale.......................................................................................................6
Figure 1.6 Stainless Steele Containers.............................................................................7
Figure 1.7 Steam Jacket Kettles......................................................................................7
Figure 1.8 Steam Jacket Kettles with Scraper...............................................................8
Figure 1.9 Transfer pump.................................................................................................9
Figure 1.10 Stainless Steel Table......................................................................................9
Figure 1.11 Filling Line ..................................................................................................10
Figure 1.12 Pallet Jack...................................................................................................11
Figure 3.1 Channels of Distribution:..............................................................................30
Figure 4.1 Breakeven Analysis Using Change in Wholesale Price..............................39
Figure 4.2 Breakeven Analysis Using Change in Yearly Production..........................39
viii
List of Tables
Table 1.1 Capital Budget Summary...............................................................................16
Table 1.2 Breakdown of equipment cost........................................................................16
Table 1.3 Cost of Goods Manufactured.........................................................................17
Table 1.4 Cost of Goods Sold..........................................................................................18
Table 1.5 Average days Inventory...................................................................................19
Table 1.6 Inventory costs.................................................................................................19
Table 1.7 Cash Conversion Cycle...................................................................................20
Table 2.1 Plant manager salary and benefits for 2007..................................................23
Table 2.2 Secretary and sales manager salaries and benefits for 2007.......................23
Table 2.3 Annual wages and benefits for all 4 plant workers in 2007.........................23
Table 3.1 Competition......................................................................................................28
Table 3.2 Marketing Budget Plan...................................................................................31
Table 4.1 Financing Plan for XXXXX Foods................................................................35
Table 4.2 Balance Sheet for XXXXX Foods as at December 31, 2007........................35
Table 4.3 Unit Cost of Production in 2014 (first year of full production)...................36
Table 4.4 Sensitivity of Critical Variables.....................................................................38
Table 4.5 Changes in Key Numbers After Proposed Changes.....................................41
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Board of directors-5
2 internal. 3 external
President/Plant
Manager
VicePresident/Secretary
Treasurer
Sales Manager
service road as possible but still allow transport trucks enough room to turn and
access the loading dock at the back of the building. The entire location will be
graveled and maintained with fresh graveled every 2 years.
A.
Raw, cleaned
lentils arrive in
Totes.
B.
First Steam
Jacket Kettle
C.
Ingredients
taken from
storage
D.
Ingredients
measured and
added to
tomato sauce
E.
Second Steam Jacket
Kettle with Agitator
G.
F.
Jars put in
Position
Filling Line
H.
Capping
I.
Labeling
J.
Storage
K.
Retail
Sales
(Employee 2)
Figure 1.8 Steam Jacket Kettle with Scraper. (Alard Equipment. Available at
http://www.alard-equipment.com)
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11
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52 weeks a year. The plant will not be open on statutory holidays and 6 plant workers
will be employed year round. The plant will produce 130,000 jars of lentil pasta sauce in
a year.
1.6.1 Average Business Day
The average day will consist of processing the lentil pasta sauce by the process
outlined earlier in the flow of work section. The employee responsible for cooking the
raw lentils in the first kettle will begin their work day at 8:00am and end at 4:00pm.
The five other plant workers will start at 9:00am and end at 5:00pm. The cook must be
dressed in proper work attire and begin cooking at 8:00am. The five additional
employees must be dressed in proper work attire and begin work in processing area by
9:00am. Proper work attire includes latex gloves, hair nets which are provided at the
plant, as well as proper work clothing that employees are responsible for purchasing. All
employees must change clothing in the change room provided. The processing line will
run continuously through out the day. Employees will rotate two at a time for a 45min
lunch break. First two employees have a lunch break from 11:15am to 12:00pm. The
next two employees lunch break runs from 12:00pm to 12:45pm. The final two
employees will have a lunch break from 12:45pm to 1:30pm. The other three salary
employees including the secretary, plant manager, and marketing manager will begin
their work day at 8:00am and end at 5:00pm. End finished product at the end of the day
will be 540 jars. Cleaning of the work stations will be completed by 5:00pm each day.
This is the responsibility of the plant workers, so processing should be completed by 4:30
to allow time for cleaning. The secretaries work day will consist of answering phone calls
to the plant, as well as ensuring delivery trucks are showing up at the scheduled times.
The plant managers day will consist of keeping the processing line in operation and
ensuring delivery trucks are loaded and unloaded when they arrive at the processing
plant. The marketing manager will be responsible for marketing the lentil pasta sauce
through Calgary Co-Op and Sobeys.
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1.7.1 HACCP
HACCP (Hazard Analysis of Critical Control Points) is used to analyze the sauce
production and distribution systems. The steps are:
1. Identify potential safety hazards such as spills, equipment malfunctions and
human error.
2. Determine where and when to prevent these problems that may occur.
3. Be sure to set some types of limits to control potential problems and set up
methods to monitor critical limits.
4. Have procedures in place to handle and correct problems if critical limits are
exceeded. Such as spill kits, Material Safety Data Sheets (MSDS) and
equipment contact numbers.
5. Accurate records must be kept and routine evaluations must be done to check
if controls are effective.
6. Periodic audits must be done to ensure the HACCP system is in working
order.
XXXXX Foods is not required to follow HACCP guidelines, but will follow them in case
the regulations are changed at a later date. In this case, their production will already be in
line with the regulations and alterations to the production process will not have to be
made. (CFIA, 2006)
16
filling line, scale, scoops, containers, pallet jacks and stainless steel tables. The steam
jacket kettles and filling lines come from Alard Equipment. The scales for weighing
lentils and ingredients come from Scales Galore. The scoops are from Rose Scientific
Ltd, and the stainless steel container, table and pallet jack come from Handling
Innovations. The printing plates and labels come from Custom Labels Inc. Boxes for
shipping come from packagingprice.com. Jars with lids for the sauce are purchased from
Ampak. Computers/printers are from Future Shop and office desks will come from
Staples business depot. A detailed list of suppliers can be found in Appendix A.
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1.11.1 Inventories
Inventory will include the raw cleaned lentils used in the sauce. Lentils cleaned
to food quality will be brought in as needed, resulting in a very small amount of raw lentil
inventory in the plant at any given time. Other raw materials will consist of the tomato
paste and spices needed for the sauce and will be ordered as needed from suppliers.
Finished products inventory will be relatively low because products will be shipped every
15 days to warehouses for Sobeys and Calgary Co-Op both located in Calgary Alberta.
The values of raw inventory, inventory in progress and finished inventory come from the
values in the capital budget.
Table 1.5 Average days Inventory
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2.2 Sales Manager (1): Will be in charge of selling and marketing the product. Their
base salary will be $50,000 + $4,523 in benefits. Total Salary and benefits is $54,523 for
the 2007 year. The employee filling this position will need to have some experience
and/or post secondary education in business value or marketing. They will need to be in
contact with the distributors, frequently learning and inventing new ways to market and
sell the pasta sauce. Table 2.2 describes benefits for sales manager.
2.3 Secretary (1): Will be involved in administration including paying of bills, payroll
and accounting in general. Also ordering of supplies, ordering and receiving information
from the future retails such as invoicing, and directing phone calls to whomever the caller
may need to talk to. They will be responsible for entering data such as sales numbers or
information on new retails. Computer skills will be an asset towards the secretary
position and the position will pay $35,000 + $3,166 in benefits = $38,166/year. Table 2.2
describes benefits for secretary.
2.4 Plant workers: Four total plant employees will be making the sauce which will
change to six when the plant reaches full production. This will include unloading and
loading of transport trucks and moving both raw and finished products to storage. The
23
job descriptions for plant workers have been covered in the flow of work. The laborers
are required to follow proper sanitation requirements while cooking the lentils and
mixing the sauce. They will have to be trained to work each machine in the facility and
will be put through first aid classes. Qualifications include a high school education and
upward. These positions will be paid on wage bases of $12.50/hour with benefits to aid
in keeping high employee moral and keep them within the company. Annual wages for
each employee will be $26,000 + $4,836 in benefits = $30,836/year for each of the six
employees. In year one the total plant laborer wages: $30,836 x 4 employees =
$123,344/year plus the plant managers $56,400 gives a total of $179,744. Table 2.3
summarizes benefits and wages for 4 employees in 2007.
2.6 Compensation
All plant workers will be eligible for workers compensation if on the job injuries
occur. Compensation will only be paid to the physical laborers and not to the
management team rates are all included in the tables 2.1 -2.3.
24
Table 2.2 Secretary and sales manager salaries and benefits for 2007
Table 2.3 Annual wages and benefits for all 4 plant workers in 2007
25
26
would give a more exclusive position drawing more attention to the new product and its
benefits.
3.2.3Price
The specialty nature of the product means there is room for mark-up in
comparison with competing pasta sauces. In comparing mainstream sauces to organic
sauce it is concluded that a reasonable mark-up for XXXXX would be 25% above its
competitors. Being the target market is made up of people who are willing to spend a
higher portion of disposable income on food, assumes the premium for the product will
be easily accepted. Although this product is not organic, its noble qualities appeal to a
similar market. The product is priced in line with an organic sauce, the retail price of
organic sauce is in the range of $4.35- $4.50, therefore a retail price of $5.88 will be the
goal for XXXX pasta sauce based on a 30 % mark up from the wholesale price, with a
wholesale price of $4.12
3.2.4Promotion
As with any new product, product awareness is extremely important. Although
the pasta sauce market has many competitors, XXXXX stands alone in the pulse enriched
sauce market; this niche product is a novelty quality that will be used to penetrate sales,
requiring a promotional strategy to establish brand loyalty. The promotional strategy will
based on magazine advertisements in the Calgary Vegetarian Resource; Flair, Country
Women; weekly flyers through Sobeys and FCL, as well as in-store taste testing, and
internet websites.
27
3.3.2 Target
The target market is the vegetarian population in Calgary, as well as the female
health conscious individuals in Calgary as well. XXXX Foods will position XXXXX
into the urban centers, because 4% of urban populations are vegetarian; 78% of
vegetarians are female and as such 72% of this segment is between 20 and 39 years of
age. (Calgary Vegetarian Resource).
3.3.3 Position
The image that XXXXX foods is portraying of XXXXX is a healthy meat
alternative for the vegetarian population, as well as a healthy protein supplement to the
health conscious individual. XXXXX will be marketed in the health food aisle.
28
29
Package Size
(ml)
Price ($)
700
2.27
Prego Traditional
675
2.98
Ragu
700
2.48
700
3.48
700
2.98
Classico di Basilicata
700
2.98
Compliments Traditional
700
2.77
Compliments Organic
700
5.48
Primo
680
2.48
680
1.98
398
1.48
3.5.5 Customers
By looking at the attributes of the lentil pasta sauce that XXXXX Foods will be
marketing, and the current trends of the health food industry, the intended target is the
active, vegetarian, as well as the health conscious female consumer. Due to the
occurrence of these individuals being concentrated in larger urban centers, we will focus
on the city of Calgary. This equates to approximately 40 000 persons. (Calgary
Vegetarian Resource, 2005). Calgary was chosen because of its relative population; high
percentage of young individuals, as well as the expanding growth of the city. This will
aid in marketing/advertising and product movement of XXXXXs early life.
The customer segment chosen to be focused on is the increasing vegetarian
population found in large urban centers. Health concerned and conscious consumers are
AgEc 495. College of Agriculture and Bioresources
30
beginning to switch more towards the vegetarian inclined diets. Requirements of a high
value protein source, cholesterol free products, and high dietary fibre found in legumes
and pulses are recommended in everyday diets of vegetarians. (Calgary Vegetarian
Resource, 2005).
3.5.6 Opportunity
As society today becomes more health conscious, and vegetarians are looking for
additional meat alternatives, XXXXX will be of a greater demand. XXXXX will be
marketed in the health food, specialty aisle. This offers the product two advantages, the
first being a healthy pasta sauce choice, because of the protein found in lentils. The
second opportunity is the focus towards vegetarians, as a meat replacement. In targeting
both attributes of the sectors within the two grocery chains; XXXXX has realm of
opportunity. In the beginning stages of XXXXX development, the product will be
marketed to Calgary, and surrounding areas. XXXXX Foods will then look at expanding
into the Saskatchewan market of the Sobeys grocery chain as a long term opportunity.
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32
$
$
$
$
$
$
$
$
$
$
$
15,000
10,135
15,000
300
40,435
5,000
200
4,800
5,350
20,540
70,975
33
34
3.7.7 Travel
The $4,800 is based on a yearly travel expense. Because XXXXX Foods is based
on a wholesale distribution to Sobeys and Calgary Co-op travel expenses to drive and sell
this product will be low. The numbers are based on approximately ten trips to Calgary
where the offices and stores for Sobeys and Calgary Co-op are located.
3.7.8 Freight
The yearly cost of freight is $20,540.00. This number is based from trucking,
from Saskatchewan to Calgary Alberta, based on the estimated trips will haul XXXXX,
to both retail stores in Calgary.
35
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ending cash flow values. While interest on debt will represent an expense for the
company, the loan only covers a small amount of the total capital required.
After examining the base run of the financial situation of XXXXX Foods, the plan
appears to be unfeasible. The ending cash flow in every year comes up negative unless a
huge initial equity investment of 1,625,000 is made. This number is far too high to be
realistic and does not fix the companys financial problems, only nurses it through the
first 10 years of operation to maintain a positive cash flow. The following financing
budget uses values that would let XXXXX construct the plant and maintain operations in
year one, but would run into cash flow problems at the end of year one as well as in
following years.
Table 4.1 Financing Plan for XXXXX Foods
Schedule 7: Financing Budget
2007
$115,000
Owners Equity
485,000
Total
$500,000
$(101,026)
35,556
21,621
$(43,849)
Liabilities
Current Liabilities
Accounts Payable
$33,476
110,765
$144,240
Owners Equity
Owner Equity
Retained Earnings
Total Owner Equity
$385,000
(207,571)
$177,429
37
Total Assets
$321,669
$321,669
Because there is not currently a plant in operation, the land, building and
equipment all need be purchased new. A more in depth brakedown of the building and
equipment costs are shown in Schedule 6 Appendix B. Because the balance sheet shown
is for the end of the first year, it shows accounts payable and receivables that represent 2
weeks of finished product inventory, as well as one months worth of production worth of
raw materials inventory.
$0.20
0.99
$1.19
$1.80
0.60
$3.59
$1.50
$5.09
38
39
Base Case
Best Case
% Change
(worst)
$4.12
70,000
(breakeven year 1)
$6.36
121,382
54
173
As shown in the tables, the XXXXX Foods financial models are more sensitive to
a change in price than in volume. A smaller percentage change in price can allow the
company to reach its breakeven levels in comparison to increasing production. Because
of the unreasonable levels of price increase required and the increased production levels
that are beyond plant capacity, a combination of both would be required to allow the plan
to be feasible.
Since the base model of the plan is unfeasible, there is no concern over how much
decrease is allowable for both production levels and wholesale price. In the case
presented in the preceding pages, all numbers were found using the breakeven levels as a
basis for the best case scenario facing the company.
4.5.3 Breakeven Analysis
Figures 4.1 and 4.2 show the breakeven analysis by altering the wholesale price of
the sauce and the level of production respectively. As shown by Figure 4.1, the
breakeven prices that are required are all much higher than the base price of $4.12 per jar.
These prices, although attractive to the goals of the plan, are unrealistic in the pasta sauce
market. To obtain wholesale prices of $4.12, the retail selling price would have to be
$7.22 to reach the cash flow breakeven, and $9.04 to breakeven the net income. These
prices are far too high in comparison to other products that are already available on the
market. A more detailed comparison of competing products is given in the marketing
section of this plan.
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Figure 4.2 shows the levels of production that would result in breakeven scenario
for both cash flow and net income. These levels are both substantially higher than the
base levels. In early years, there may be a slight possibility of producing more than the
base run if experienced workers are hired. Even in the case of finding, skilled employees,
the higher production levels are only a positive if the extra product can be sold. Because
this product is unique, it is unlikely that any such skilled employees will be easy to find,
especially when considering the low wage levels, and the relatively remote area of
Shaunavon. It is also important to note that the estimated production capacity of the plant
being built is 130,000 jars of sauce. The required levels of production required to break
even are higher than capacity in every year with the exception of year one.
4.5.4 Alternative Salary Scenario
The business plan presented represents ideal numbers of employees and
competitive salaries. As with many businesses that are owned and operated by the same
individuals, it may be of interest to examine what will happen to the financial model if
the owners take on more responsibility to streamline the number of employees, or take a
cut in pay in an effort to make the business succeed. The following section will examine
how the financial model will be affected if the secretarial services are done for free, as
well as the position of plant manager taking on the duties of the sales manager and taking
a $10,000 pay cut. In addition, the assumption will be made that by intensively training
hired employees, production will be more efficient and one wage earning employee can
be eliminated. The wage for the remaining workers will stay at the same level to stay
competitive with other positions with similar required qualifications.
If the changes listed are made, the financial situation of the company does see
improvement. The ending cash flow at the end of the first year becomes positive, but is
followed by three years of negative flows. This is a huge improvement over the base
model in which all years ended in a negative cash flow. Another improvement can be
seen in the net income category. In the base run, all year showed losses, and in the
revised run, the company showed net income in the fifth year. The net present value also
showed improvement, changing from $-913,535 to $-319,599. The final noteworthy
changes come in the values of the IRR and ERR. The based run showed that a negative
AgEc 495. College of Agriculture and Bioresources
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return to owners equity that made a calculation impossible, and after changes were made
the values were: IRR = -1.0% and ERR = -0.9%. These levels are beginning to approach
a positive level and make the business plan look like a more attractive possibility. In
addition to the listed changed, the cash flow could be positive and thus make the plan
feasible if the initial owner equity investment was raised to $430,000. The added start up
capital would allow the company to keep a positive cash flow throughout the first ten
year of operation. Table 4.5 summarized the effect that the changed listed above have on
some of the key numbers of the financial model.
Table 4.5 Changes in Key Numbers After Proposed Changes
Net Income ($)
Ending Cash Balance ($)
NPV ($)
IRR
ERR
Year 1
-74,497
67,814
Year 5
15,503
48,371
-327,099
-0.9%
-1.0%
Year 10
50,784
259,242
4.6 Conclusion
After running the financial model, it is found that the plan is unfeasible. The
negative ending cash flows mean that the model doesnt work. If XXXXX Foods is still
intending to construct a plant, there needs to be some changes in the employment
structure, as well as some re-evaluation in the scope and size of the project. If the
financial figures are ignored and the plan is followed as written, finding investors to
finance the project will be nearly impossible to recruit, and their investments will be lost
within a few years.
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5.0 References
Websites:
Alard Equipment: Available at - http://www.alard-equipment.com/we_buy.htm
Calgary Vegetarian Resource: Available at - http://www.calgaryveg.com
Country Women Magazine: Available at - http://www.countrywomanmagazine.com
Federated Co-op: Available at - http://www.fcl.ca
Handling Innovations: Available at - http://www.handlinginnovations.com
Flare Magazine: Available at - http://www.flare.com
Future Shop: Available at - http://www.futureshop.ca
Pulse Canada: Available at - http://www.pulsecanada.com
XXXXX Foods: Available at - http://www.XXXXXfoods.com
Rose Scientific Ltd: Available at - http://www.rosesci.com
Scale Galore: Available at - http://www.scalesgalore.com
Sobeys Grocery Chain: Available at - http://www.sobeys.ca
Staples Business Depot: Available at - http://www.staples.ca
Statistics Canada: Available at - http://www.statcan.ca
Quotes:
Ampack: Available at - http://www.ampack.co
Costco: Available at - http://www.costco.ca
Custom Labels Inc: Available at http://customlabelsinc.com
D and D Lumber
Risdale Trucking: Available at - http://www.sasktrucking.com
Saputos: Available at - http://www.saputo.ca
Saskpower: Available at - http://www.saskpower.com
Sasktel: Available at - http://www.sasktel.ca
ULine: Available at - http://www.uline.com
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6.0 Appendix A
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46
7.0 Appendix B
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