We are in the era where the organizations are the most inventive social arrangement of our age and of civilization. It will be spectacle to know that hundred of thousand of people with highly individualized background, skills and interests are coordinated in various corporations to pursue common goals (Erich A. Helfert 2001, p.78). Organizations are being formed for a specific purpose to earn profit and increase shareholder’s equity. According to a large school of thoughts, doing business it is not difficult but to maintain its productivity and profit maximization potential is difficult indeed (Leopard, A & Bernstein, J 1999, p.48). In this short analytical report, we will write a sort of business memorandum in which we will talk about the company on which this entire report will be based on. The company on which we have done the analysis is Toledo Tool Company. The scope and objective of this memorandum is to apprise people especially the investors and our employees regarding the potential of the organization. Potential means the revenue recognition and profit maximization stance of the company. The analysis has been performed on one year time period. The analysis has been done with the help of Sensitivity Analysis. Sensitivity Analysis (hereafter SA) is the eyeball of how the exception (jolt) in the crop of a mathematical sway can be distributed, qualitatively or quantitatively, to changeable sources of turn in the store of the design. Start another way; it is a way for systematically forcible limitations in a sheer to arrange the effects of such changes. In more spontaneous terms astonishment and sense search analyze the strength of architecture when the grind includes some harmony of mathematical sculpture. Sensitivity whack can be practical to processor modelers for a march of purposes.
The rationale behind using SA in this assignment is to understand the entire relationship between the revenues and net profit of the organization comprehensively. The usage of sensitivity analysis in this assignment allows us to manipulate the figures of the revenues with different revenue recognition stances. We have used spreadsheets to perform this entire analysis because the spread sheets are quite common in performing such types of complex and mathematical computation. All the parameters we have used are sales driven, it means if the figures of the sales change then it must leave an impact over the other items of the income statement including the bottom line of the company.
Toledo Tool Company has three different products which are Hedge Clippers, Line Trimmers and Leaf Blowers. The units produced are the same for all these products which are 50,000 units except for Leaf Blowers which has 100,000 units (total units will be 200,000). The total sales revenue which we will earn with the predetermined selling price will be 24 million with 11.25 million of Variable cost. After subtracting Selling & Administration (S&A) expenses and the provisions of Income taxes, we have the budgeted net income of 2.97 million FY 2004. In this calculation, it must be noted that we have not accounted the fixed cost in it. In the next question, we have accounted for the same, a fixed cost of 7.8 million. Now by considering the same cost we have calculated the Break Even Point (BEP) which intimate us that how much units we have to produce and then sell to come over the stage where we gain nothing and also lose nothing as well. Sales of share volumes has been reduced to 25% each as far as Hedge Clippers and Line Trimmers are concerned and reduced by 50% for Leaf Blowers which reduced the total unit produced and sell to a level of 162,500 from previously 200,000. The figure apprise us that Toledo Tool Company, has to produced 162,500 units to come to the BEP where they stand on no profit and no loss. BEP manufacturing can be count as good results during the time of economic contraction and financial constrain but if the company envisaged extensive BEP then the company will lose the confidence of their consumers. The units which we have calculated is section 2 is un adjusted, so to be more specific we have to calculate the BEP with adjusted figure. In this section the fixed cost will be the same which is 7.8 million but the manufacturing cost has also been included in the production process, which increased the BEP units for the company. Now the company has to produce 200,000 units to come at the point of no profit and no loss. The company has done it in a professional manner as Hedge Clippers, Line Trimmers produced 40,000 units each and Leaf Blowers produced 120,000 units. As we have discussed earlier that all the parameters are sales driven it means any increment or reduction in the provision of sell must have an economic impact over the net income and cost as well.