Value Chain
The objective of analyzing Monster’s value chain is to make a product that will become popular to its customers, which includes not only the production segment but also marketing and distribution (Horngren and Data, 2015). This is because products will eventually need to be discontinued due to changing customer preferences and product innovation from competitors. This means that the company’s core operations and its products must continuously evolve and this could be done using the value chain analysis tool. For an energy drink company like Monster, one of its main goals is to continuously adapt to the changing customer preferences by developing new flavors and beverage while discontinuing unpopular products. Monster management use regular product evaluations as well as the development of seasonal products to cater to different markets. The reason for the addition of seasonal products is that some of the company’s markets may require a local flavor resulting to new agreements with both downstream and upstream supply chains.
Breakeven Point (BOP)
The nature of the business revealed that Monster is both a distributor and manufacturer of energy drinks, which means that it does not only decides on a sales price but must also control production costs. The annual report revealed that each product includes both fixed and variable costs, which are estimated to be at $4.50 for the variable while annual fixed costs total to $425m. Walmart’s website revealed that the average selling price of each Monster beverage is currently at $7.90. Using the above values the BOP by volume is at 125 million cans, which means that the BOP in dollar sales is at $987.5m. The first figure revealed that Monster must need to 125m cans to cover the production cost while the second figure reveals that Monster must reach $987.5m in revenues to achieve an acceptable profit level. The problem is that the inability to reach the minimum break-even volume or dollar sales can potentially result in losses. The value of computing for the BOP is that it reveals different operational scenarios when production costs increase or a decline in sales prices.
Product Costing
Manufacturing cost are composed of both fixed and variable costs but these can fluctuate due to changes in transportation costs, raw material as well as sponsorship fees. This is because costing for energy drinks can vary depending on the purchase price acquired from the downstream supply chain as well as pressure from consumers and competitors from the upstream supply chain. Based on the breakeven point segment the ingredients for each product includes cans, flavors, other ingredients, packing materials, and concentrates. However, different flavors or concentrates may be more expensive due to seasonal availability or that a more complicated can design will require a more expensive printing process. This means that variable costs will eventually fluctuate as well as management decisions that affect fixed costs. Fixed costs such as freight-out can fluctuate due to the volatility of oil and gas prices as well as the acquisition of a more popular endorser.
Budget
The 2016 annual report implied that the company was able to sell 274,621 cases of 192oz packs of energy drinks with Monster Energy having the highest volume (Monster, 2016). With the assumption of a 40% revenue contribution Monster Energy is computed to be sold at $0.124 per ounce or a total of 21.24m ounces. The use of ratios further revealed that production costs are only $0.05 per ounce based on a 40% cost of sales. The cost per ounce was broken down further using activity based costing based on numerous assumptions and limited information. The fixed costs is estimated to be at 33.1% based on the 2015 annual report resulting to a cost per ounce of $0.041. Under the above assumptions of a 21.24m volume sales at a $0.124 sales price per ounce, $0.05 production cost and $0.041 fixed costs then the operating income is at $701,065.70 or 26.61% of product revenues. Due to a positive value the resulting operating income is therefore considered to be a viable or marketable product.
Investment Project
Most companies computes for the NVP or IRR in order to determine the potential product’s future sustainability with regards to cash flows. The reason for this is that some of the company products will eventually be discontinued due to the changing consumer preferences. This means that the company need to invest additional capital for the development of a new product, which was estimated to be at $1.7m. Monster management was able to forecast an operating income of $701,065 for the first year of operations based on the breakeven point, product costing, and budget segments of this report. Monster assumes that the investment’s estimated life is maximized at 3 years and further assumes that operating income will increase by 5% in succeeding years due to increasing demand along with fixed costs in year 2 and 3. The resulting value of the net present value is computed to be a positive $188,640 and that the internal rate of return is at 16.02%. This was seen to be below the estimated operating income margin of 26.61% but higher than the 10% minimum cost of capital (Brigham and Daves, 2014), which implied that the new investment is profitable and therefore must be implemented.
Balanced Scorecard
Coombs, Hobbs, and Jenkins (2005, p.134) defined the balanced scorecard as a measurement tool that analyzes and measures the success or failure of an organization’s current strategy in order to achieve their corporate goal. This includes both financial and operational performance measures, which means that both the past and future performance of the organization must be examined (Horngren, Harrison and Oliver, 2012, p.1156). The reason for this is that organization’s cannot solely rely on the past financial performance since there are other critical factors for the organization’s success in the future (Horngren, Harrison and Oliver, 2012, p.1156).
The proposed project is a new monster product, which means that the four perspectives of the BSC must be considered. The reason for this is that the company has a loyal following from the current products and that the new product may disrupt their company perception especially if the new product does not complement the current product line. The four perspectives of the BSC are financial, customer, internal business, and learning and growth perspective (Horngren, Harrison and Oliver, 2012, p.1157).
Chosen BSC Metrics
The chosen metrics within the company’s BSC are product volume orders by customers/distributors for the financial perspective, frequency of repeat customer order for the customer perspective, post-sales service for internal business perspective, and employee turnover for the learning and growth perspective. The main measurement to be used for this performance metric is a comparison of the frequency and volume of products ordered by each customer for a specific period, which may be limited to a month or a year. The expected target of the financial perspective is to achieve a minimum of 125,000,000 cans per year for the new product with an expected sales value of $987.5 million.
Strategic Initiative and BSC Linkage
The strategic initiatives implemented by Monster management in 2015 and 2016 are the long-term partnership agreement with Coca-Cola and the acquisition of an ingredient supplier (Bylund, 2016). The acquisition effect on a new product such as the Mutant (Bylund, 2016) is that it improves the manufacturing efficiency of the company due to a more reliable raw material supply. The additional effect of the long-term partnership with Coca-Cola is that Monster Beverage products can increase its market penetration (Bylund, 2016) due to the scope and reach of coca-cola’s existing distributors (Monster, 2016, p.1).
Based on the development of a new Monster product the strategic development of a coca-cola partnership is considered to be more relevant than the acquisition of a downstream supply chain. The reason for this is that in 2014 Monster Beverage has been distributing its products to 116 countries and territories (Monster, 2015, p.2) but was later expanded to approximately 156 due to the Coca-cola partnership (Monster, 2016, p.13). The additional benefit of the partnership is that Coca-cola can use its existing distributors to improve the market penetration of Monster products in previously untapped markets.
Financial Perspective. The advantage of the strategic initiative of a coca-cola partnership is that Monster can improve product demand by supplying a larger market. This was seen in the increase in the 192-ounce case equivalents from 238.28 million in 2014 to 274.62 million in 2015 (Monster, 2016, p.46). This has a volume difference of around 36.34 million in 192-ounce case equivalents, which means that Monster Beverage can easily attain the expected sales volume of 21.24 million ounces from the new product. The problem will be if the actual sales volume will be lower or exceed the forecasted sales volume per product since Hyland (2016) only revealed a 29% year-over-year case sales increase.
However the main issue with the developed operating income statement for the new product where the expected operating income ratio of 26.61% can either improve or decline. The reason for this is that the average net revenue had already declined by 8.14% from $10.20 to only $9.37 per case (Hyland, 2016). This means that if the manufacturing costs remain constant so that the theoretical product cost per ounce remains at $0.05 then Monster Beverage can expect a decline in the operating income specifically for the new product. This is because Monster Beverage management may decide to decrease the sales price of the new product in order to increase its popularity to existing customers while encouraging the patronage of new customers. This promotional strategy is considered to be realistic especially with the continuing criticism of the safeness of energy drinks by external individuals (Monster, 2015, p.2).
Customer Perspective. The success of the popularity of energy drinks is primarily dependent on the perception and loyalty of the customers. This means that selling expenses can increase, which includes sampling, advertising, and in-store demonstration costs along with sponsorship expenses, point-of-sale materials and premium items, and other marketing and design expenses (Monster, 2016, p.82). The reason for this is that customer patronage and loyalty can be developed when customers are given samples to determine compatibility with regards to taste preferences. Relevant information with regards to customer preferences can be acquired with an initial test sample for taste, product design, costing, and market applicability. This is because some markets may prefer to have a wider variety of products while other markets are more traditional with their beverage choices. This is especially true for the international markets since previously untapped markets in the 156 countries and territories may not be familiar with energy drinks (Monster, 2016, p.13).
Therefore the company must be initially successful in the promotion and acceptance of the current product line to its existing markets before adding new products or variants. This can be seen in the comparison of the initial order volume of the new product and succeeding volume orders. This is because an increase in sales volume for the new product may imply acceptance by existing customers with regards to its taste. A decline in sales volume on the other hand implies an unsuccessful taste acceptance and may require a more intensive product campaign. This information could be determined by a customer survey from end consumers rather than from company distributors. Another factor to include in the customer satisfaction survey is their perception with regards to shelf display space (Schlosberg , 2016) along with taste preferences and cost. Success of the new product can be implied when demand exceeds the production supply.
Internal Business Perspective. The success of an in-demand product is considered to be inadequate when the company cannot produce enough supply to satisfy the customer demand. This is why the acquisition of a downstream supply chain is considered to be crucial in the company operations. One of the reasons given is that manufacturing efficiencies are improved when the company has a reliable supply chain especially when there are occurrences of industry-wide shortages for important ingredients (Monster, 2016, p.16). Supplier prioritization for other customers can result in the manufacturing delay or stoppage of certain Monster Beverage products and its effect can decline consumer loyalty. The most problematic effect is the shifting of consumer loyalty to another brand and company. This is the main reason why Monster Beverage acquired the ingredient supplier, American Fruits and Flavors, in 2016 (Hyland, 2016).
However another reason is that Monster Beverage case sales demand is increasing by 29% on a year-over-year basis (Hyland, 2016), which means that there will eventually be a supply shortage. This was worsened by the fact that the company is limited with regards to the acquisition of alternative suppliers and manufacturers due to regulatory approvals and contractual restrictions (Monster, 2016, p.16). In order to sustain product and revenue growth Monster Beverage needs to acquire a reliable ingredient supplier, which is the American Fruits and Flavors (Hyland, 2016). The value of which is the continuing reliability and efficiency of the company’s manufacturing facilities. This targets the post-sales service wherein the company can deliver Monster products when and where customers want it.
Learning and Growth Perspective. The least significant is the learning and growth perspective in the development of new products since it primarily focuses on operating efficiency with regards to employee performance and information system capabilities. The basis of which are primarily dependent on the efficiency of the manufacturing process and logistics management. However, logistics management is also dependent on the reliability of the company workforce especially with regards to the on-time delivery of the ordered products and the movement of the raw materials from the ingredient supplier to the manufacturing facilities.
References
Brigham, E. F.., & Ehrhardt, M. (2007). Financial Management: Theory & Practice. Boston, MA: Cengage Learning.
Brigham, E. F., & Daves, . R. (2014). Intermediate Financial Management. Boston, MA: Cengage Learning.
Bylund, A. (2016). Monster Beverage Corp. earnings: Another rip-rearing growth performance. The Motley Fool. Retrieved from http://www.fool.com/investing/2016/08/09/monster-beverage-corp-earnings-another-rip-roaring.aspx
Catanzaro, T. (2016). Break Even Analysis. J Glob Econ, 4(2). http://dx.doi.org/10.4172/2375-4389.1000190
Coombs, H., Hobbs, D., & Jenkins, E. (2005). Management accounting: Principles and applications. London: Sage Publications.
Horngren, C.T., Datar, S.M., & Rejan, M.V. (2015). Cost Accounting: A Managerial Emphasis (15th ed), 4-5. Upper Saddle River, NJ: Pearson Education.
Horngren, C. T., Harrison, W. T. and Oliver, M. S. (2012). Financial & managerial accounting (3rd ed.). Boston: Prentice Hall.
Kampf, R., Majerčák, P., & Švagr, P. (2016). Application of Break-Even Point Analysis. Naše More, 63(3), 126-128. http://dx.doi.org/10.17818/nm/2016/si9
Monster Beverage Corporation. (2016). 2015 annual report. Monster Beverage Corporation. Retrieved from http://investors.monsterbevcorp.com/annuals.cfm
Monster Beverage Corporation. (2015). 2014 annual report. Monster Beverage Corporation. Retrieved from http://investors.monsterbevcorp.com/annuals.cfm
Monster Energy Drink, 16 fl oz, 4 count. (2016). Retrieved from http://www.walmart.com/ip/Monster-Energy-Drink-16-fl-oz-4-count/10534634
Appendix A. Value Chain Analysis: Monster Beverage Corp
The discussion today will begin to examine cost accounting within Monster Beverage Corporation. Specifically, this will center on their value chain they use and rely on to help the company maintain success and remain competitive within their industry.
The value chain is the sequence of business functions by which a product is made progressively more useful to customers. This includes research and development (R&D), design of products and processes, production, marketing, distributions, and customer service .
In an environment of discontinuity and intense competitive challenges, the company must face up to the strategic decay. In the current context, the competitive advantage of a company is not only just providing the higher value than its competitors, but also exceeding customers’ expectations. The long-term key success of the company is also about resilience and the capability to discover how the environment is changing, and then redefining its core business according to the circumstances. Value chain analysis is a useful tool to measure how a company creates possible value for its customers.
Research and development can be seen in the normal course of business. They discontinue certain products and/or product lines. They continue to evaluate and introduce additional flavors as well as other types of beverage to complement existing product lines and/or to which their brand names are able to add value. Design of products is very important to their success and they carefully plan, engineer, and test their products and processes. This includes deciding on the design of the cans or bottles. This can vary and changes frequently. Seasonal drinks need different appeal. Also certain raw materials may be priced higher or suppliers do not have the materials and in some instances discontinued it. Production can be affected by this as well and production is vital to their value chain. They package their products in a myriad of different package types and sizes including, but not limited to, aluminum cans, aluminum cap cans, sleek aluminum cans, aluminum cans with resealable ends and glass bottles. In addition to these packages, their bottlers package certain items in polyethylene terephthalate (PET) plastic bottles. Monster Beverage Corporation outsources their manufacturing as well as distribution through 3rd parties. They purchase sweeteners, concentrates, juices, dietary ingredients, cans, bottles, caps, labels, trays to name a few from their suppliers and depending on the beverage, the bottler/packer may also add carbonation to the products as part of the production process. They are generally responsible for arranging for the purchase and delivery to their third party bottlers, co-packers, and distributors. They have different distribution agreements in place with various distributors, one being Coca-Cola since their recent partnership. They also have agreement with Anheuser-Busch distributors to name another. The agreements in place provide for distribution of their products during initial terms of twenty years, then renewed thereafter for additional terms ranging from one to five years. They are subject to termination rights held by both parties involved in the contract. Their customers consist of full service beverage bottlers/distributors, retail grocers, military, food service customers. They do however on occasion develop and supply exclusive selected beverages in different formats to a limited number of their customers, with the goal in mind of solidifying an ongoing sale or enhancing the existing relationship. Their marketing and promotion strategy is their “sweet spot”. They have the trademark name and the patent and are widely known and recognized. They emphasize this through their elaborate design of products and product sampling. They use their branded vehicles to promote their drinks. They utilize “push-pull” methods to enhance shelf and display space exposure in sales outlets. They promote through apparel, games and prizes . They endorse sports figures such as Miss Motorcross Dianna Dahlgren. Their competitive edge is in their name which is interesting because this is not direct money cash flow related but very big profits and success from it.
Appendix B. Product Costing: Monster Beverage Corp.
Monster Beverage Corporation is a manufacturer and distributor of energy drinks. The cost structure of the company consists of both fixed and variable costs. The unit price for a can of Monster Energy drink sells at an average price of $7.90.
Variable costs
Monster’s variable costs include the cost of concentrates and beverage bases, the cost of raw materials, re-packing costs and co-packing costs. The company’s raw materials include cans, flavours, containers, bottles, packing materials and ingredients. The table below indicates each of the variable cost items and the respective costs per can of Monster’s Energy Drink.
Contribution margin
Contribution margin is the difference between the unit selling price and the total variable cost per unit . The measure is important in determining the viability of the product or project in the short-run. When the contribution margin is positive, it indicates that the product is viable in the short-run, and any decision to suspend its production will lead to more losses irrespective of whether the company breaks even or not.
Fixed costs
Monster Beverage Corporation incurs fixed costs in its operations. Fixed costs include selling and administrative expenses. It's fixed selling expenses include transport of products to customers, warehousing expenses, advertising, merchandise displays, advertising, sampling and in-store demonstrations as well as sponsorship fees. Administrative expenses include professional and service fees, office rent, supplies, depreciation of office equipment, depreciation of factory equipment and general administrative expenses. The fixed costs are as shown below.
Appendix C. Break-even Point
Break-even point is the minimum number of units Monster Beverage Corporation must sell for it to avoid losses . It is the number of cans of the energy drink that equates Monster Beverage Corporation’s total revenue to its total cost. It is the volume of sales the firm needs to make for its total contribution to offset the total fixed cost. It is given by dividing the annual fixed cost by the company’s contribution margin per unit.
Preliminary break-even point = Total annual fixed cost/Contribution margin
= 425,000,000/3.4
= 125,000,000 cans
Monster Beverage Corporation must sell a minimum of 125 million cans for it to avoid making losses on its operations. The above break-even point is given in dollars as follows:
Preliminary break-even point in dollars = BEP in units × unit selling price
= 125,000,000 × 7.90
= $987,500,000
The break-even point gives an insight as to whether Monster Beverage Corporation’s revenues can cover its production costs and guarantee a given profit level. The break-even point is compared with the current sales volume to determine the margin of safety. If the actual volume of sales is higher than the break-even point, then the product is profitable. A smaller margin of safety indicates the company is at risk of making losses should the sales volume falls.
The concept of CVP analysis can be used in planning and decision making. The management can use the analysis to determine the effect of purchasing new equipment on the profitability of the company. Besides, the analysis can be used to analyze the effect of introducing a new product line. The new product line changes the average contribution margin thereby affecting the break-even point and the profitability of the company. The impact of an increase in advertising spending among other fixed costs can also be determined using the CVP analysis.
It also assists in managerial decision-making. For instance, the management can analyse the effect of changing the selling price or the variable cost of production on the break-even point and the overall profitability of the firm. This helps in making a decision on the most suitable strategy of increasing profits. A decision that increases the break-even point is not desirable. An increase in the break-even point implies a reduction in the margin of safety thus increasing the risk of making losses.
Despite the above benefits and uses of CVP analysis, it is limited by the fact that it assumes a constant and fixed selling price and variable cost of production. Besides, it assumes that all costs are either fixed or variable. CVP also assumes that there is no inventory since all the production is sold at the end of the period. The above assumptions are unreasonable and are not true in most cases. In many firms, it is almost impossible to separate costs into purely fixed and variable costs. There are usually semi-fixed and semi-variable costs which are not considered in CVP analysis.
Appendix D. Budgeted Operating Income Statement: Monster Beverage Corp.
Monster Beverage Corporation is a leading energy-drink manufacturer based in the US. The company has been successful in the last few years to generate high demand for its products not only in its main US market but also internationally. The product selected of Monster Beverages Corporation is Monster Energy®. It is one of the most popular products of the company, and it can be expected that the company sell the most number of cases of this product in the last year. It is an important to estimate the total number of cases of this product that the company sells in a year to determine the operating income from the sales of this product. From the company’s Form 10 K report, it can be indicated that the company sold 274,621 cases of 192 ounces pack of different products. The company currently has six different brands. Based on the assumption that Monster Energy has the highest sales among these brands. Therefore, it can be assumed that the proportion of this product is 40% of the total sales. It implies that the company sold 110,648 cases of Monster Energy in 2015. The total number of cases sold by the company is used for calculating total sales revenue of Monster Energy. Each case has 192 ounce of energy drink. Therefore, it can be estimated that 110,648 cases of Monster Energy have 21,244,416 ounces of energy drink.
The cost of sales of the company in 2015 was $1,090,263,000 that was 40% of the sales revenue . It implied that the company operated at a gross profit margin of 60%. It is used for ascertaining the cost of production of Monster Energy. The current price of Monster Energy obtained from Wal-Mart website is $7.94 for a pack of 4 times 16oz cans. The price is used for calculating the price per ounce as follows.
Price per ounce: $7.94/(4 x 16) = $0.124
The cost of producing per ounce is estimated as follows.
Cost per ounce: $0.124 x 40% = $0.05
The cost per ounce is further divided in the following cost items. The activitity based costing is used for allocating different cost items to the production of Monster Energy. The estimates of each cost item are based on assumptions because actual information related to the company is not available from the company’s website or other corporate documents.
The company’s selling and administrative expenses in 2015 were $900,118 that was 33.1% of the sales revenue. The same ratio is used to allocate the proportion of selling and administrative expenses to Monster Energy sales. The price per ounce is $0.124 and therefore the selling and administrative expense per ounce is $0.041. Based on these estimations the operating income of the company related to the sales of Monster Energy is provided in the following income statement.
The evaluation of the company’s project or product can be carried out using Net Present Value (NPV) analysis. The NPV analysis involves forecasting of future cash flows that the business expects to generate from the new project or its product. The cash flows are discounted using an appropriate discount rate that is the cost of capital of the company. The cost of capital is the cost of funds acquired by the company from different sources including equity and debt. The sum of present value (discounted value) is deducted from the initial investment cost to determine the net present value. If the NPV is positive, then the company should go ahead with the project or continue with the product. Furthermore, the NPV analysis is supported by the calculation of Internal Rate of Return (IRR). The IRR is the rate at which the NPV becomes zero. It is the minimum rate of return that the business needs to generate on its project or product to cover its investment costs. In the current analysis, the case of Monster Beverages Company and its product Monster Energy Drink is considered.
The company is already producing and selling Monster Energy Drink. However, it is assumed for this report that the company is planning to introduce a new product that is Monster Energy Drink. The amount of initial investment is assumed and presented in the following table.
The company has estimated operating profit for the sale of Monster Energy Drink for one year. It is provided in the following table.
For the current analysis, the operating income is considered as the cash flow expected by the company from the sale of Monster Energy Drink. Furthermore, the analysis requires at least three years of projections. It is assumed based on the estimation of the economic life of the machinery before additional investment will be required. Therefore, the project life is three years and the cash flows are projected for the next years. Furthermore, the company assumes that the operating income of Monster Energy Drink will grow by 5% in Year 2 and Year 3. The growth rate is based on the historical data of the company. The selling and administrative expenses related to Monster Energy Drink operations are estimated to increase by 2% in Year 2 and Year 3. The future cash flows (operating income) are provided in the following table.
The internal rate of return is 16.02% (approximately) by using trial and error method. At this rate the present value of future cash flows is equal to the initial investment amount that results in zero value of net present value. This is the rate that the company can expect to achieve from the new project. It is greater than the cost of capital (10%) that implies that the new product will generate a high return for the company. It could be suggested that the company should accept the new project of producing and selling Monster Energy Drinks.
