Financial Assumptions

The following assumptions were used by the proponents in the computation and

analysis of the financial capacity and stability of the firm:

1. Initial Capital Requirement:

The business has an initial capital of P 400,000 that will be contributed by

the partners in equal amount.

2. Working Days:

There will be Five (5) working days in a week, an average of twenty (20)

days in a month and two hundred thirty (230) days in a year excluding the legal

holidays (10) days.

3. Accounting Reporting Period

A calendar year of business starting on January 2020 would be implemented.

4. Production Capacity:

The firm will produce 7,200 on the first year of its operation. Production

capacity is expected to increase by 10% starting from the second year and to the

succeeding years.

5. Purchases:

a. The volume of purchases (direct and indirect materials) would increase

proportionately with increase in the quantity produced. Costs of purchases

are assumed to increase by 2.90% based on average inflation rate

b. Purchase discounts shall be taken up at the start of the operations. It shall

be taken up at a rate of 2%.

c. Purchases of raw materials and will be 90% cash and 10% on account.
 d. Purchases of indirect materials will be on cash basis.

6. Sales:

a. The initial selling price per pack of the product is P 236.41 for retailers

Increase in the selling price is brought by many factors such as production

increase and average of 2.9% per year based on the average inflation

rate.

b. Cash sales will be equivalent to 70% of gross sales and credit sales would

be 30% of the gross sales.

c. Collection of credit sales is 90% annually and Accounts Receivable will be

equivalent to 10% of the credit sales. Provision for doubtful accounts

would be 2% of the outstanding receivable, there will be no write-off of

accounts receivable.

7. Inventory:

a. The FIFO method would be used in valuing the inventory.

b. Direct materials inventory end is 10% of the net direct materials purchases

of the current month, direct materials used are 90% of net direct materials

purchased.

c. There will be no work-in process inventory.

d. Finished goods ending inventory is 10% of the current month’s total goods

available for sale.

8. Labor:

a. Labor cost increase is based on the average inflation rate of 2.9%.

 b. Labor rate for the workers is P 7,460.00 per month and is assumed to

increase by 2.9% annually.

c. The employees will be paid on the 15th and 30th of each month.

9. Employee Benefits:

SSS, PhilHealth, Pagibig and Fringe benefits of the workers are part of the

manufacturing expenses.

10. Utilities:

Utility expenses are assumed to increase by 2.9%; 75% will be applied to

the factory and 25% will be applied to administrative expenses.

11. Rent Expense:

a. Rent expense is assumed to be P 1,500.00 per month

b. Rent expense would be allocated to factory and office according to the

land each occupies (70%-factory, 30%-office).

12. Maintenance Expense:

a. Maintenance expense increase is based on the average inflation rate of

2.9%.

b. Maintenance expense would be allocated to factory and office according

to the land each occupies (70%-factory, 30%-office).

13. Property, Plant and Equipment:

a. Acquisition of equipment’s, furniture and fixtures will be on cash basis. No

additional machinery would be purchased for the first five years of

operation.
 b. The firm will use the straight line method of depreciation with no residual

value.

14. Advertising Expense:

Advertising expense from 2020-2024 will have a yearly increase of 2.9%

based on the average inflation rate.

15. Partnership Equity:

a. Withdrawal is not allowed for partners in the first year of operation. All

partners are allowed to withdraw in the succeeding years provided that it

will not exceed 10% of their capital at the beginning of the year. An

interest of 10% based on the partner’s initial investment will be included in

their distribution of profits.

b. Withdrawal is always allowed if the result of the operation is favorable.

c. Remaining profits are shared equally by the partners in accordance with

the agreement of the partners as stipulated in the contract.

d. The manager will receive a P 10,000.00 every year as salary allowance

16. Inflation Rate

Inflation rate is peg at an average rate of 2.9% per year based on the

average inflation rate for 2019 BSP website.