Report on Parson Foods Vegetable Company

Executive Summary of Chicken Sensations

Parson Foods Vegetable Company (PFVC) is working in the food industry with a widely integrating product line. Company is aimed to introduce a new chicken product in the market of the US. Following this plan, an economic feasibility analysis is taken for the company. Economic feasibility analysis includes analysis of revenue, quality, cost, breakeven, the margin of safety, contribution margin, and sensitivity analysis. Results of these analyses will be used to accept or reject the implementation of this new product introduction plan. According to the analysis, Parson Foods Vegetable Company (PFVC) is required to produce at least $1252223 in its sales revenue to keep net income positive or generate profit. Sales below this limit will contribute to increasing financial loss for the company. Although, the margin of safety and sensitivity analysis are in favour of chicken sensation business. The report includes details about the limitations and benefits, advantages and disadvantagesof each technique used in the economic feasibility analysis. 

Introduction of Chicken Sensations

Economic feasibility analysis is the technique commonly used by the firms to estimate possible responses from the targeted market. Economic feasibility analysis is mainly taken to avoid risk. Such analysis represents the cost and benefits associated with the project or a business product to be introduced in the market. Companies working in a competitive environment are required to conduct research on the market to estimate expected responses of customers towards their selected products to be offered in the market. Regarding this, the researcher can assist management in the decision-making process by highlighting the cost-benefit analysis and market analysis. Mainly economic feasibility analysis is consist of technical analysis, market analysis, strategic analysis, and economic analysis.

The present work is about economic feasibility analysisof Parson Foods Vegetable Company (PFVC). According to the case study, Parson Foods Vegetable Company (PFVC) is launching a new product line of chicken sensations in the proposed targeted market. The company named Parson Foods Vegetable Company (PFVC) was established in 1925. The main purpose of the company was to provide healthy and safe milk to the natives of the US. After some time Parson Foods Vegetable Company also launched a large range of canned vegetables. In between, the company tried to sell a soup product named Soup-in-a-flash that caused the company to bear a huge loss. The amount of loss was approximately $10 million as the finished goods remained unsold. And now the CEO of the company disclosed the news of launching a new product that will be titled Chicken Sensations. According to the expected sale, this product will rise 20% of the total revenue.

Present work is aimed to provide cost and benefit analysis for this company. The analysis will provide assistance to the managerial staff of Parson Foods Vegetable Company (PFVC) in determining future possible outcomes of this new product “chicken sensations”.

Chick Sensation Economic Feasibility Analysis

In this report section, an economic feasibility analysis is presented for Chicken Sensation launched by Parson Foods Vegetable Company (PFVC). Feasibility analysis is taken to provide assistance in the decision making process at Parson Foods Vegetable Company (PFVC). Economic feasibility analysis includes the following analysis:

a)      Quantity, Revenue, and Cost Conversions

According to the analysis, the company will sell out at least 65,000 cases during the first month. The analysis represents that Parson Foods Vegetable Company (PFVC) would be capable to sell out at least 1770000 units during the first year. However, based on the sales volume forecast it can be said that the company will provide at least 1327500 units (cases) after the completion of the first year (see table 1 in appendix). According to the provided information in the case study, each case contains at least 15 bags of chicken sensation. While each case has around 12 pound weight of chicken sensations (including vegetables, chicken, and other ingredients).Thus, annual quantity to be sold in after one year duration is 1327500. Additionally, the analysis concluded that retailers would generate revenue of $36 per case (containing 12 bags). While after deducting the sales commission of 6%, the company would have its net sales revenue for the cases sold in the market. Furthermore, the cost is not limited to the retailer's commission only. Other important costs to be considered while calculating net income are raw material cost (chicken, vegetables, spaetzles), direct labour cost, packaging cost, depreciation cost, and fixed cost. The analysis represents that annual depreciation cost and fixed costs are $400,000 and $8800000 respectively (see the appendix __ table 1). Somehow, the variable cost per unit is limited to 28.97.

b)     Forecasted Contribution Margin Income Statement

To support economic feasibility analysis for Chicken Sensations of Parson Foods Vegetable Company (PFVC), a forecasted contributed margin based income statement is developed. Forecasted contribution margin income statement represents the prediction of managerial staff regarding the sales of chicken sensation in one-year duration. Forecasted contribution margin income statement includes the projection of one year and annualoutcomes (while including growth rate). Following this income statement, total revenue is 63720000. This amount is calculated by using $36 as revenue for the original year and 32 for pessimistic year duration.

Somehow, the contribution margin value is used to calculate operating income for the year (see table 2 in appendix).According to the calculations, contribution margin (cases) for the chicken sensation is around 7.03after the completion ofthe first year. While after the deduction of fixed cost from contribution margin we have calculated operating income for the company. The analysis represents that operating income for the sales of 1770000 cases is limited to 3643100. The operating income is mainly 2.058% of total sales revenue (see the appendix below). Based on analysis it can be said that Forecasted contribution margin income statement is an effective technique for the estimation of expected net income when managers are not familiar with the actual variable cost and operating costs. Furthermore, by using contribution margin (revenue minus total variable cost) we can understand the percentage of fixed cost available in the company.

c)      Breakeven Analysis of Chicken Sensations

The breakeven analysis represents the point where operating income starts for the company. Here, in this case, breakeven analysis is taken to identify the total required cases to be sold and must require an income of sold cases to keep net income positive for the company. According to the analysis, breakeven cases (per unit) are 64,12523 which is rounded off to the nearest value of 6412500 (see table 3 below in the appendix). While on the other hand, sales dollars breakeven for theyear 1 forecast of chicken sensations is around 1252223. Breakeven cases are calculated as dividing the breakeven sales dollars (for chicken sensation year 1) by the value ofselling price per case (in forecasted year 1).  According to the analysis, the company would not be able to generate a positive stream of net income in case company fails to meet the limit of breakeven cases (breakeven unit) in the specified time duration. Parson Foods Vegetable Company (PFVC) is interested to generate high revenue stream with positive net income (profit) as detailed by the case study. Considering this objective, it is clear that breakeven analysis values can be set as primary targets or milestones for the business of chicken sensation in one year duration. Setting this objective will give a clear overview of the management to maintain the sales of their offered product as well as determine the success rateof the business.

d)     Margin of Safety of Chicken Sensations

The margin of safety is a principle in investment that provide a measurement of intrinsic values of purchases or investment products. The margin of safety excludes the value of breakeven sales for the year fromestimated sales of the relevant year. In this case, the margin of safety for cases is calculated for chicken sensation (sales in year 1) by subtracting breakeven sales of 1252223 from expected sales of (cases) 1770000. Following this, the margin of safety for cases is 517777. While on the other hand, the margin of safety (dollars) is around 18639957 which is calculated by subtracting 45080043 (selling price)  from 63720000 (margin of safety cases).

According to the research, the margin of safety is a realistic measure to determine the safety margin for the chicken sensation product. The margin of safety analysis has several benefits and limitations for the decision-makers. First of all, the margin of safety is the easiest and simple way to analyze the relationship between cost and associated financial benefits. Secondly, the margin of safety is a benefit for chicken sensation product analysis to conclude the required sales volume during a specified time duration (for instance, a year). Somehow, its limitations reduce its effectiveness for the organization. Following analysis, the margin of safety also requires some pretty unrealistic assumptions which can draw negative impact on decision making process. Considering this, the margin of safety analysis should be used in combination with other analysis to reach realisticoutcomes for the company(Blocher, 2006).

e)      Sensitivity Analysis of Chicken Sensations

Sensitivity analysis is the primarily taken study the organizations to identify uncertainties associated with a model, new system, investment product, company’s product or an asset. Sensitivity analysis represents allocated risk and uncertainties caused by different sources of inputs. According to the analysis, three main categorized are developed to represent product sensitivity. These categories are pessimistic, original, and optimistic. Following analysis, cost per pound of chicken has sensitivity values as 112%, 100%, and 87.5% for pessimistic, original, and optimistic values respectively. Although, the margin of safety for pessimistic, original, and optimistic cases are -1956082, 517777, and 698320 respectively (see table 5 in the appendix). Moreover, the margin of safety ratios are calculated as -1.46, 29%, and 38.83%  for pessimistic, original, and optimistic (percentage values are in the same order).

This financial model has several advantages and disadvantages that need to be considered while implementing it for economic feasibility analysis or to use as a decision indicator for chicken sensation product offered by Parson Foods Vegetable Company (PFVC). The following are the pros and cons of sensitivity analysis(Rankin & Stuebs:, 2017):

·         Advantages of Chicken Sensations:

1.      Sensitivity analysis provides support in the identification of the most suitable solution by providing outcomes of all possible alternatives(Efinancemanagement.com, 2020).

2.      Sensitivity analysis can also assist in quality check, proper resources allocations, decision making, and in-depth analysis.

·         Limitations of Chicken Sensations:

1.      Sensitivity analysis is mainly based on assumptions regarding project or product outcomes which can be wrong. Thus overall nature of decision making is also assumption based for pessimistic and optimistic values in the shared case study of chicken sensations.

2.      Sensitivity analysis is not relative in nature which is the major limitation regarding the use of sensitivity analysis in this case of chicken sensations launch by theParson Foods Vegetable Company (PFVC).

Thus, the analysis concludes thatParson Foods Vegetable Company (PFVC) need to consider these limitations of assumptions and nature while deciding the matter of chicken sensation launch in the US.

Conclusion of Chicken Sensations

The whole discussion concludes that Parson Foods Vegetable Company (PFVC) is operating well in the targeted market. However, considering the goal of business expansion and profitability, the company has planned to introduce a new product line for food delivery. Under this new product line, chicken sensation cases and boxes will be offered to the customers at various prices. Following the plan, the company will sell out at least 65,000 cases of chicken sensation during the introduction stage. However, after continuous growth on a monthly basis, an estimated quality of cases to be sold in one year duration are around 1770000 cases. Summarizing, economic feasibility analysis, Parson Foods Vegetable Company (PFVC) will generate positive income for the annual operations by selling at least 6412523 cases. Moreover, the margin of safety and sensitivity analysis represent unrealistic and assumption based estimations or forecast for the chicken sensation product of Parson Foods Vegetable Company (PFVC). All analysis of cost, benefit, or market analysis it can be concluded that economic feasibility analysis can better present the future position of the company.Somehow, managers of the Parson Foods Vegetable Company (PFVC) are required to consider the limitation of these analysis techniques before taking a final decision regarding the offered product of chicken sensation. 

Appendix of Chicken Sensations of Chicken Sensations

Table 1    Quantity, Revenue, and Cost Conversions

Table 2 Income statement

Table 3 Breakeven Analysis

Table 4 Margin of Safety

Table 5 Sensitivity Analysis

References of Chicken Sensations

Blocher. (2006). Cost Management: A Strategic Emphasis. Tata McGraw-Hill Education.

Efinancemanagement.com. (2020). Advantages and Disadvantages of Sensitive Analysis. Retrieved from efinancemanagement.com: https://efinancemanagement.com/investment-decisions/advantages-disadvantages-of-sensitive-analysis

Rankin, R., & Stuebs:, M. (2017). The Chicken or The Egg: Hatching a New and Innovative Product. IMA Educational Case Journal, 10(2), 1-6.