Innovative And Fun Learning Tools For Children

About Educational Toys

The company decided to start the manufacturing business that deals in the line of educational tools for children. The company will start with two director, husband and wife and it has been registered with the name “Educational Toys”. Educational Toys will be less profitable in the first year but from the end of the first year, the company will have a steep increase in sales for several years.

 Initially, the company planned to offer only three types of education toys. First is the Number toy, a fun related toy that teaches children the number skills and some English words. Second product is the letter toy, which has the name hints and helps to quickly grab the alphabet. Last product is the Phonic toy, an electronic device that functions similar to the mini PC and teaches phonic and math skills. The motive behind this idea is to develop the core skills within kids along with some fun. Currently, the toy industry has recorded a bumper sale of educational toys and has captured almost 30 % of the market (Toy Industry Association, INC. 2010)

 The initial fund required to setup and market the product will be £ 140,000 and it is planned to make repayment of the principal amount in equal instalments starting after one year from the establishment date.

 Educational Toys is a new company that has developed three types of educational toys. The toys are called educational toys because they provide some learning with fun involved in it to children. The company has planned to market the products within the U.K only with future consideration of the global distribution. Educational Toys is privately held company with husband and wife as the principal shareholders. The main objective of the management is to create a profitable company, research and develop innovative educational toys, and enhance the knowledge of children through the use of interactive toys. So, to achieve the objectives, the company has the mission to make the highest quality educational toys and introduce new features that help children to learn more from toys. Management also decided to trademark “Educational Toys” as its brand name (GOV.UK. 2012).

 At the initial stage, the company wants to market and sell only three products-Number Toy, Letter Toy and Phonic Toy. All the three types of toys have distinct functions with a variety of options. These educational toys are fun to play with, but at the same time, they are useful in teaching children the required skills. Recently, the company has finished the research on the products and they are almost complete to launch. The details of product features with their cost and selling price are as follows.

• Number Toy: the toy emits light and sound when touch by the stylus given along with the product. There are series of numbers on the front side of the toy, which blink when the stylus comes in contact with it. In addition to teaching the numbers, it helps children with hand and eye coordination. The planned cost of this product is £ 12.00 having £ 2.00 fixed and £ 10.00 variable.
• Letter Toy: This product resembles the Number Toy, but only difference in both products is that the Number Toy helps in teaching numbers, whereas the Letter Toy helps in teaching children the alphabets. Like Number Toy, it has light and sound features, and this product is also successful in improving children’s attention span. The cost planned for this product is exactly similar to the Number toy. So, the cost of the product is £ 00 with £ 3.00 fixed and £ 10.00 variable.
• Phonic Toy: It is an advanced toy and it looks similar to a mini laptop. At the front side, there is a touch screen and there are some buttons to get the access of the main menu. Inside the unit, there is a child’s book and stylus. Stylus is used to touch the screen and the device starts reading stories loud, plays the musical instruments and guides children along the basic surrounding. The estimated cost of the product is £ 25 having £ 00 fixed and £ 16.00 variable.

In the U.K. the market size of toy products is very huge. There are few large players in this industry and several small and regional manufacturers. The two main competitors of Educational Toys are:

• Lego limited: Lego Group is engaged in the development of children’s creativity with the help of playing and learning. Currently, the company provides toys, experience, and teaching material for children in more than 130 countries. It is the world’s third largest manufacturer of play materials (Lego 2013).
• Rob-Roy Toy Makers: It is one of the oldest toy shops in the U.K. and is selling wooden toys that make children happy and also provide some education guidance (Rob-Roy Toy Maker 2013).

 Management decided to keep the selling price of all three products below the competitors’ price to give a high level of competition in the market. Price decided by the cost department is as follows:

Product	Selling Price	Cost Price	Fixed part	Variable part
Number Toy	£15.00	£12.00	£2.00	£10.00
Letter Toy	£17.00	£13.00	£3.00	£10.00
Phonic Toy	£25.00	£21.00	£5.00	£16.00

Products Offered

 The cost department has set the above prices after the price analysis of similar products by the competitors in the same market. This level of price will help the company to gain a new market as early as possible. The prices have been kept low because initially the company wants to grab as many customers it can and in the second year of working, the company has decided to increase the prices of products by some percentage. The price range for different products can provide a competitive edge among different customers, but the quality product with low price will help to attract new customers because of the low cost to be incurred in purchasing similar products (Lucey 2003).

 The cost of the product will include both variable, as well as, fixed cost due to the nature of the business. Variable cost of the product will include the material cost, labour cost and variable direct overhead cost, whereas the fixed cost will comprise of fixed overhead only. Administrative cost and selling and distribution cost is not apportion in the cost of the product because it is not possible to divide this cost with the number of products.

Particulars	Number Toy	Letter Toy	Phonic Toy	Total
Variable Cost
Raw material Cost	£5.00	£5.50	£8.00	£18.50
Labour Cost	£3.00	£2.50	£5.00	£10.50
Direct manufacturing overhead	£2.00	£2.00	£3.00	£7.00
Total variable costs	£10.00	£10.00	£16.00	£36.00
Fixed Cost
General Overhead Cost	£2.00	£3.00	£5.00	£10.00
Total variable and fixed cost	£12.00	£13.00	£21.00	£46.00
Un-apportioned Cost
Selling and distribution cost				£45,000.00
Administrative Cost				£35,000.00

Number of Products and their equivalent cost
Particulars	Number Toy	Letter Toy	Phonic Toy	Total
No. of Product	5,000	5,000	2,500
Cost of the product	£12.00	£13.00	£21.00
Total variable and fixed cost	£60,000.00	£65,000.00	£52,500.00	£177,500.00
Selling and distribution cost				£45,000.00
Administrative Cost				£35,000.00
Total		£257,500.00

Calculation of Breakeven point
Total fixed expenses	£117,500.00
Variable Cost	£36.00
Breakeven point	3263.89 or 3263 units

The break even point of the company will be determined using per unit contribution margin and total fixed cost of the different products. On analysing the break even point it can be said that company need to sell 3263 units to cover its fixed expenses. The expected sales of the products are much higher than the companies break even point. The net present value calculated shows that company will have positive outflow in the coming years which will help to increase the future production in order to grab the new markets (Friedman 2009)

Conclusion

On analysing the operational budget and five years budget income statement it can be concluded that company will be able to generate sufficient cash flow to have a positive net present value. In the first year of working company will be able to sell 4890 units of Number toy, 4580 of letter toy and 2250 units of phonic toy. The total cost of the product will be £ 193,200 and net profit will be 14,260. The break even units of the company product will be 3263 units that show the company will get higher amount of safety margin that will improve overall earning of the firm. The firm will earn cash inflows as per given below table:

1 year	2 year	3 year	4 year	5 year
£ 14,260.00	£26,862.00	£     45,921.90	£62,217.53	£85,749.60

On the basis of above calculated cash inflows the net present value will be £30,960 with the consideration of five years income statement. (See appendix). The firm will earn sufficient amount of profitability and cash inflows to repay the bank borrowings that will also enable it to growth as large scale in the market (Drury 2005).

This activity will help to understand the use of creative thinking and financial analysis in the business plan. It helps in learning various ways to present the cost data in the cost sheet and also provides the guidance on operational budget and forecast income statement. This activity tells how to do planning for the new business, how to find the investors, and also prepare the students to become a good entrepreneur. It shows how to calculate the break even point and net present value of the business. It also assists on how to make use of budgeted figures to conclude with the net borrowings and repayment schedule.