<font color=teal> Research from a long, Part 2
Re: Reply to proveittome Part 2
by: makemilns (38/M) 11/26/00 2:39 pm
Msg: 41117 of 41131
Sales: Gum revenue increased sequentially and year to year every quarter in 1998 and into Q1 1999. Year to year sales were higher in Q2 99, but sequentially lower than Q1 99. Year to year and sequential sales began falling in Q3 99, and have fallen every quarter since. The decline in sales has been solely responsible for declining margins on the gum side, but this issue will be remedied once sales of gum increase. The increase will come from sales of dental gum to the major consumer products company and sales of nicotine gum to the joint venture with Swedish Match.
Cost of sales: Gum Tech’s cost of sales include a variable component and a fixed component. In my estimation, the fixed component is approximately $500,000 quarterly, and includes things such as quality assurance personnel, first line supervisory labor, direct labor to make and package gum, labor overhead such as medical and life insurance, leave, and holidays, and other costs of production that don’t vary with the quantity of output. While labor could be considered a variable cost, my discussions with Gum Tech management lead me to believe that they can produce at least $15 million quarterly in gum before a measurable amount of additional labor would be required. Since their production is way below that, I think it is fair to include the cost of labor as a fixed cost. Variable costs include things such as the cost of raw materials, electricity to run the production equipment, etc, and in my estimation are approximately 45% to 50% of sales. Let’s assume for a moment that sales of gum increase to $5 million quarterly. The fixed costs would remain at about $500,000 and variable costs would rise to about $2.5 million, for total cost of sales of about $3 million. Under this scenario, their gross profit would be $2 million, or 40% of sales. I believe that this is a reasonable expectation, and also believe that they will sell a minimum of $5 million quarterly when they start producing dental gum for the large consumer products company. Actually I believe that their gross margin will rise to 45% to 55% with the higher level of production, but to be conservative, let’s leave it at 40%.
Operating expenses, also called general and administrative expenses, include things such as salaries for officers, salaries for administrative personnel, rent, utilities for office space, and perhaps the cost to purchase and maintain machinery, etc. With few exceptions, these expenses have been in the $500k to $700k range quarterly, and I don’t think they will increase much even if sales increase to $15 million quarterly. The reason is that they already have plenty of excess capacity, but for the purposes of this estimate, let’s assume that operating expenses rise to $1 million if sales increase to $5 million. |
