TOOL Box Inc. (2021)

Paul Jacob, president of TOOL Box Inc. , required funding to start manufacturing and marketing a new invention of his, a pasta server. He was uncertain how much funding he would need since the amount was dependent on sales. He wanted to start production in two weeks, on August 1, 2021. Since his distribution system was already arranged, he believed he could start selling as soon as the units were produced. He approached several venture capitalists after being turned down by the Metropolitan Bank, a Canadian charted bank, but was reluctant to agree to what he considered excessive demands for their capital investment. He had just returned from a meeting with Dale Reid, a private investor from Toronto, who had expressed an interest in the firm. In order that he could evaluate his potential investment, Mr. Reid asked Jacob to produce projected income statements, balance sheets, and cash flow statements for Utensil Box Inc. up to July 31, 2022.

History

TOOLBOX, founded in May 2019 was owned jointly by Paul and Sally Jacob. The company was formed to design, develop, manufacture and to market a unique household utensil, a pasta server. The specially curved patented plastic apparatus, to be sold retail for $4.50, could be used to stir, pick up and to serve all varieties of pasta.

Paul, who was 35, had conceived the idea for the device while working for the Food Research Institute of Agriculture Canada as a research biologist. As a recent CONESTOGA graduate, he was confident that he could bring his idea to fruition. His enthusiasm was echoed by his wife, Sally, aged 30, who, after having worked as a bookeeper, was to enter an ACCOUNTING program in September. In addition to her studies, she planned to act as vice-president and secretary of TOOL Box Inc., while Paul would be President and Treasurer.

The Jacobs had already spent $13,800 before incorporation on obtaining patent approval for their invention in Canada and the United States. Patents were also being processed in Italy, Germany, France and Britain. With initial capital of $20,700 raised from personal loans of $12,000 from the Metropolitan Bank and $8,700 from Best Finance Ltd., the Jacobs had established an office at their home in Kitchener and had purchased production equipment. Capital expenditures consisted of $865 for office equipment, $23,300 for a single cavity production mold, $4,200 for tools and dies and $4,430 for a blister pack mold. Development costs incurred on the molds were included in these amounts.

By July, Utensil Box was ready to begin production. An agreement was made with Perfect Plastics, Inc. in Cambridge to manufacture the utensil under contract, using TOOLBox Inc. molds, at a cost of $.70 per unit. Packaging arrangements were concluded with B. Crawford & Sons Lithographic Ltd. of Kitchener to package the products the same month as produced. Distribution agreements were made with Household Ware Sales Inc., Cooker Ltd., and Firenzo Sales Ltd.

Unfortunately, by this time, initial funds had been exhausted on capital expenditures and the final payment of $14,200 was due in August on the production mold. Cash was also required for monthly administrative expenses of $4,325 for salaries, office expenses, insurance, telephone, internet and website maintenance, utilities, automobile expenses, and miscellaneous supplies once production started. Perfect Plastics would not begin production without a 50 per cent deposit and the remainder was due before any units would be released for sale. The packaging company also required cash payments on delivery. Without additional funding, the Jacobs could not start production or distribution.

Production

The pasta server would be manufactured by an injection molding process. The process made possible the rapid production of highly finished and detailed plastic units. Plastic was melted and then injected under thousands of kilograms of pressure into a mold which was held closed by a clamping mechanism. The devices were formed into a cavity, the two halves of the mold separated allowing the formed part to fall free. In injection molding, parts could be formed in either single or multiple cavity molds, depending on total production, production rate, size and weight of the part, size of machine available and the mold cost. TOOLBOX initially planned to use a single cavity production mold (one device per cycle). Since four cycles could be completed per minute, monthly production capacity was about 40,000 units.

Paul feared a stock-out and planned an initial production run of 40,000 units. His production strategy was to order sufficient units to replace units sold, and to maintain a minimum of 10,000 units inventory. Perfect Plastics required production runs of at least 5,000 units. Paul planned, initially, to store inventory in the basement and garage of his home, but if inventory exceeded 10,000 units he would have to rent warehouse space at a cost of $250 per month. The warehouse space, with a capacity of 35,000 units, could be leased on a monthly basis as needed and no annual lease was required. Lease payments were due the month following.

Paul had also discussed with his accountant the problem of depreciation of the production mold. The life of a mold depended on the type of steel used, the number of cycles, the type of material to be molded and the complexity of the part to be manufactured. Handled properly, molds used to manufacture devices similar to the pasta server lasted for millions of units. However, from a practical viewpoint, Paul recognized that his single cavity mold WOULD be obsolete after producing only 162,000 units if he decided to buy the new two cavity mold. His accountant suggested that a depreciation charge of $.145 per unit be used in pro-forma statements to account for wear and tear and obsolescence of the mold. A combined depreciation charge of $.017 per unit was recommended for the package mold and tool and dies. In addition, $10 per month was allowed for depreciation of office equipment, which was to be considered as an administrative expense.

The products would be blister packaged on an attractive backing which would clearly show the consumer various applications for the device. Products would be packaged the same month as they were produced. Packaging costs for the product were $.43 per unit. Material costs were included in these prices. Utensil Box would pay for shipping expenses of $.085 per unit, incurred when units were sold.

Marketing

The Jacobs suggested that every family in North America was a potential purchaser, since they believed all families ate some variety of pasta. The Canadian population consisted of 18 million families (2020 Census dataSimilar data is provided for Ontario, Toronto and Kitchener. The United States market was about 10 times larger.

Household Ware Sales Inc. would handle the accounts of the Hudsons Bay Company, Wal-Mart and COSTCO. Cooker Ltd. was to handle DOLLAR STORES and independent boutiques. Firenzo Sales Ltd. would handle grocery outlets such as Sobeys, Loblaws and Freshco.

The wholesale price by Utensil Box to the distributors was $2.10per unit, net 30 days. Paul believed 50 per cent of receipts would be paid the month following the sale and the remainder within the second month. Wholesalers would sell the product to retail outlets for $2.50. Utensil Box was also considering expanding distribution to the United States and, once patents were approved, to Europe.

Although no identical products used specifically for pasta were on the market, similar plastic kitchen utensils were occasionally used for pasta serving. These devices sold for $3.45 to $5.15, with retailers generally receiving a 100 per cent markup.

Promotion by TOOLBox Inc. would consist of an attractive blister package for the product and free guest appearances on television talk and cooking shows such as Canada A.M. and Celebrity Cooks. Free press exposure was anticipated through editorial statements and consumer goods articles. Retail stores would be encouraged to conduct in-store promotions and to display the device with pasta products. Consumer questionnaires would be made available to ascertain public reaction.

A web-site was planned and would be maintained by Sally. The website would have videos of the pasta server in use and testimonials from happy customers. Initially the product would not be available for sale online. However, Paul had contacted an online distributor of kitchen wares and was investigating the possibilities.

Considerable reliance was placed on the distributors to promote the product. The Jacobs anticipated that 500 units would be given away monthly for the first four months for promotional purposes(TOOLBOX would pay the shipping charges for the promotional units given away). Pauls accountant suggested that these should be counted as sales expenses at their cost of $1.292 per unit ($.70 for mold manufacturing, $.43 for packaging, plus $.162 for depreciation), the same amount as would be used to value inventory. The other suggestion was to delay amortization of the patent until Utensil Box had two profitable years.

Financial Implications

Exhibit 2 shows the balance sheet for TOOLBOX as of July 15, 2021. Dale Reid was considering investing up to $90,000 for a 50 per cent share of the equity and profits of the new company. Reid stated that he may be willing to settle for a smaller ownership stake but his investment would be disproportionately lower. He would not consider investing an amount greater than $90,000 unless the Jacobs increased their investment in the company significantly. However, before he made any commitments, he wanted to examine, very carefully, a set of pro-forma statements for the venture. Reid suggested that the Jacobs calculate the total amount of financing required each month (do not include interest expense in your calculations) and from those calculations determine the total amount of financing that he would need to invest.

The Jacobs did not believe that they could invest any more personal funds in the company since their personal assets were tied up in the business, their home and personal possessions (Exhibit 3).

Monthly sales of the pasta serving devices were difficult to project. Pauls reasonable expectation was 10,000 units and he had prepared a production schedule based on this sales level (Exhibit 4). His most pessimistic and optimistic monthly sales forecasts were 5,000 units and 30,000 units respectively. If sales were 30,000 units or more per month, for two consecutive months, he planned to order a larger two-cavity production mold (two devices per cycle). The capital cost, including development, would be $63,000, payable in three monthly installments, starting the month the equipment was ordered. A three month lead time, from the time of ordering, was required before this mold would be operational. When operational, the mold would not only double production capacity, but also cut costs in half to $.35 per unit. Pauls accountant suggested a depreciation allowance of $.062 per unit for the two cavity mold. With the reduction in material and depreciation costs, inventory would be costed at $.859 per unit.

Paul believed that the first fiscal years results ending July 31, 2022 were critical for the success of Utensil Box. He required forecasted cash flow, income statements, and balance sheets for these three different sales projections. Paul planned to use a 20 per cent tax rate. If taxes were payable, they would be due 45 days after Utensil Box year end of July 31, 2022.

The Jacobs wished to limit the amount of money required from Mr. Reid. They wanted to retain as much control over the business as possible. However they recognized the danger of being under-financed. Once they decided what amount they would request from Mr. Reid, they would complete a formal information package and drop in to see Mr. Reid with their complete pro-forma financial statements.

Required:

Produce projected income statements, balance sheets, and cash budgets for Utensil Box Inc. up to July 31, 2022 for all three production scenarios 5,000, 10,000 and 30,000 units.