Economic Feasibility Analysis Essay

Introduction

Economic feasibility analysis involves evaluating the cost and benefits associated with an activity. The chicken sensations can only be beneficial to the company if its benefits outweigh costs. Economic feasibility includes aspects such as sales quantity, sales revenue, costs, contribution margin, sensitivity analysis, break-even and sensitivity analysis.

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Quantity, Revenue, and Cost Conversions

The company will sell 65,000 cases in the first month of operation as shown in Table 1. Sales will then increase by 15,000 cases monthly implying that the total annual sales for the first year of operation will be 1,770,000 cases. The expected positive sales growth is favorable as it enhances growth and future profitability as well as sustainability of the Chicken Sensations product line. Every case will be selling at $36 while the variable production cost per unit will be $24. The company incurs an addition $2.40 per case on coupons and 6% commission as shown in Table 1. The above data shows that the price per case is higher than the total variable costs. This is important since a product cannot be sustainable in long-run if its average revenue is less than the variable cost. The total annual fixed cost is expected to be $8,400,000.

Forecasted Contribution Margin Income Statement

As shown in Table 2, Chicken Sensations will generate annual revenue of $63,720,000 while the total variable cost of production will be $51,281,325. It implies that the product will have a positive total contribution of $12,438,675. A positive contribution is a favorable sign of the product's profit potential. A product can only be profitable if it has a positive contribution (Drury, 2005). With a positive contribution, the company needs to sell a sufficient quantity to cover the fixed cost of production. Further analysis shows that the expected operating income is $3,638,675. It implies that Chicken Sensations will be profitable since the total revenue outweighs the sum of the total variable and fixed costs.

Break-Even Analysis

Break-even shows the quantity and revenue the company must generate it avoid making losses (Drury, 2005). Table 3 shows the chicken Sensations will break-even at a sales level of 1,252,223 cases. It means that the company must sell at least 1,252,223 cases to guarantee a profit. The break-even point is about 70% of the budgeted sales volume of Chicken Sensations. A low break-even point is desirable since the company does not have to sell a large quantity to guarantee profits.

Margin of Safety

As shown in Table 4, The product' margin of safety is 517,777 implying that Chicken Sensations sales have to fall by 517,777 from the budgeted level for it to start making losses. It represents 29.5% of the total budgeted sales. The high margin of sales shows that the product has a low risk of running into losses due to insufficient quantity of sales (Drury, 2005). It is highly unlikely that the actual annual sales of Chicken Sensations would be 29.5% less than the budgeted sales volume. Besides, 29.5% is higher than the sales forecast percentage error (25%).

Sensitivity Analysis

This section analyses the impact of changes in sales volume, price per case and cost per pound of chicken on the profitability of Chicken Sensations. It considers the pessimistic and optimistic options and compares the outcome with the original budgeted values. The pessimistic involves a 25% decline in sales, a 10% decrease in price per bag and a 12.5% increase in the cost per pound of chicken. On the other hand, the optimistic view entails a 25% increase in sales, a 10% rise in the price per bag and a 12.5% decline in the cost per pound of chicken.

As shown in Table 5, the if the pessimistic conditions occur, the product's contribution margin declines from 19.52% to 8.93% while the net margin falls from 5.71% to -11.53%. The break-even point increases to 3,034,482 cases, and the margin of safety becomes negative implying that Chicken Sensations will not be profitable since the break-even point exceed the budgeted sales volume. Operating income will fall by 236%, and Chicken Sensations will no longer be profitable. On the other hand, a change to the Optimistic state will cause a 336% increase in operating income to $15,894,819. The contribution margin ratio will also increase by 44% to 28.19%. The analysis indicates that the performance of Chicken Sensations will be highly sensitive to changes in sales volume, price per bag and cost of chicken.

The above quantitative analysis indicates that Chicken Sensations will be profitable. Thus, I would approve the idea and allow PFVC to develop and market the product since it will improve the company's overall profitability.

Impacts

Benefits and Harms

Chicken Sensations will improve the profitability of PFVC. Based on the analysis, the product will be profitable. Due to its nutritional value, the company expects that its gross margin will be double the current vegetable offerings. Secondly, it will help the company diversify its product base thereby spreading risks and improving the company's overall profitability. It will also enhance PFVC's competitive advantage since none of the competitors is offering a similar product as Chicken Sensations.

Possible harms include loss of millions of investment if the product fails. Richard notes that the last time PFVC tried to launch a new product, it failed miserably and had to write off $10 million investment. Besides, the CEO risks losing his job if the new product fails to meet its expectations. Although not mentioned, the development of Chicken Sensations could lead to a reduction in sales of the current vegetable offerings.

Rights

Richard is exercising his right to undertake measures to improve the profitability of Parson Foods Vegetable Company. Apart from the new product, the team had been working on structural reforms to cut administration and marketing costs. Richard also respected Carlos Rico's right to be heard. Carlos proposed the new product, and despite having reservations, Richard instituted a team to evaluate the feasibility of the product.

Result

The above impacts do not change my decision on the viability of Chicken Sensations. The product will be profitable as shown by the feasibility analysis. The possible harms are just risks which are associated with any business idea. The company cannot avoid risks if it wants to improve its profitability.

Responsibilities

PFVC Management

Richard and other PFVC executives have the duty to maximize shareholders' wealth. This involves identifying and investing in viable projects and avoid high-risk projects with lower returns (Brink, 2011). The management must carefully evaluate any project before committing shareholders' funds. They have a fiduciary responsibility of protecting the best interest of PFVC's shareholders by acting in their best interest (Brink, 2011).

The management also has a responsibility to employees and other company stakeholders. A wrong investment decision that leads to massive losses to the company adversely affect the company's employees. Therefore, the actions of Richard and other executives impact the lives of PFVC's employees.

Vicki Hoerning

Vicki has a critical responsibility of evaluating new projects as well as managing the finances of the company. Financial viability is the most critical aspect of any investment, including new product development. Collecting relevant data and assessing the economic feasibility of the product ensures that the company invests in only profitable products. Vicki's role is to ensure that the company maximizes profits by investing in viable projects.

References

Brink, A. (2011). Corporate Governance and Business Ethics. Dordrecht: Springer Science+Business Media B.V.

Drury, C. (2005). Management accounting for business. London: Thomson.