1) Inspired by the ancient Chinese strategist, Sun Tzu, Luxor Cosmetics has decided to focus on what is working, and to minimize what is not. The following is a comprehensive plan to save the company from bankruptcy.

a) Spend the same amount on marketing as was spent for 2010. However, focus all marketing on the cream product line.

b) Spend an additional $1.0 million on cream research and development to expand the cream line. This is a new expense for the company.

c) Due to the focus on creams, cream sales will double over 2010 sales levels.

d) Sales ($) of lipstick and nail polish will each fall by 25% compared to 2010 sales.

e) At the end of 2011 a complete liquidation of all old inventory will be made. The entire 2011 ending inventory will be sold for 40% of wholesale prices.

f) Liquidate $2.0 million (book value) of property and equipment related to the lipstick and nail polish product lines. The property and equipment will be sold for $.5 million, a loss of $1.5 million.

g) Accelerate the collection of receivables by $1.0 million. This will cause the collection of cash from customers to increase by $1.0 over sales, and it will also cause the Miscellaneous current assets to decrease by $1.0 million.

h) The accounts payable terms will be renegotiated resulting in a slowdown of payments for materials of $1.0 million. That is, the cash outlay for variable manufacturing costs will decrease by $1.0 million. In addition, Miscellaneous Current Liabilities will increase by $1.0 million.

i) Goodwill will be written-off as an impairment loss.

j) Bank loan balance and related interest expense will not change.

2011 Budget Nail polish Creams Lipstick Total 25.5 Schedule A: Inventory Movement Expressed in Wholesale Selling Price (WSP) 2010 Inventory at wholesale selling prices Lipstick Nail polish Creams Total Beginning inventory $ 13.5 $ 11.0 $ 1.0 $ Budgeted sales and production $ $ 11.6 $ 6.6 $ Goods available for sale $ 31.5 $ 22.6 $ 7.6 $ Less Actual Sales $ 16.5 $ 11.2 $ 6.4 $ Ending Inventory $ 15.0 $ 11.4 $ 1.2 $ 18.0 36.2 61.7 34.1 27.6 Converting Wholesale price to cost 2011 Nail Polish Creams Total COG Manufature Budgeted sales and Prod Auditor Cost Percentage Ending Inventory Multiplied by Auditor Cost percentage Ending Inventory 2010 Lipstick Nail Polish Creams Total $ 16.3 $ 9.9 $ 3.7 S $ 18.0 $ 11.6 $ 6.6 $ 85% 75% 55% $ 15.0 $ 11.4 $ 1.2 $ $ 13.6 $ 9.6 $ 0.7 $ $ 13.6 $ 9.6 $ 0.7 $ Lipstick 29.9 36.2 77% 27.6 23.9 23.9 2011 Nail polish Creams Total Schedule B: Statement of Cost of Goods Sold 2010 COGS Calculation Lipstick Nail polish Creams Total Variable Manufacturing Costs $ 15.3 $ 9.3 $ 3.3 $ Plus Fixed Manufacturing Costs $ 1.0 $ 0.6 $ 0.4 $ Total COG Manufacturing $ 16.3 $ 9.9 S 3.7 $ Plus Beginning Inventory $ 12.2 $ 8.2 $ 0.6 $ COG Available for sale $ 28.5 $ 18.1 $ 4.3 $ Less ending inventory $ 13.6 S 9.6 $ 0.7 $ COGS $ 14.9 $ 8.5 $ 3.6 $ Lipstick 27.9 2.0 29.9 21.0 50.9 23.9 27.0 Schedule C: Income Statement Schedule E: Balance Sheet 2010 Budget 2011 S Sales Less COGS Gross Margin Marketing and Promotion General Administration Total Marketing and G&A Expense Operating Income Interest Expense Pretax net income $ $ $ S $ $ 2010 Budget 2011 34.1 27.0 7.1 3.6 1.3 4.9 2.2 1.8 0.4 Assets: Cash Miscellaneous Current Assets Inventory Total Current Assets Property and Equipment Goodwill Total PPE and Intangible Assets Total assets 5.5 3.0 23.9 32.4 12.2 9.3 21.5 53.9 $ $ $ S S $ $ $ Liabilities: Miscellaeous Current Liabilities Bank Loan Payable Total Liabilities $ S $ 4.0 26.3 30.3 Stockholders Equity: Common Stock $ Retained Earnings $ Total Stockholders Equity $ Total Liabilities and Stockholders Equity $ 12.5 11.1 23.6 53.9 Schedule D: Cash Flow Statement 2010 Budget 2011 Cash Flow from Operations Cash Receipts From Customers Total Cash Receipts $ $ 34.1 34.1 Cash Disbursements Variable Manufacturing Costs Fixed Manufacturing Costs Marketing and Promotion General Administration Interest Total Disbursements Cash Flow from Operations $ $ $ $ S $ $ 27.9 1.0 3.6 1.3 1.8 35.6 (1.5) Cash flow from Investing Cash Flow from Financing Increase (decrease) in Bank Loan Net Change in Cash Beginning cash balance Ending Cash balance $ $ 7.0 5.5 2011 Budget Nail polish Creams Lipstick Total 25.5 Schedule A: Inventory Movement Expressed in Wholesale Selling Price (WSP) 2010 Inventory at wholesale selling prices Lipstick Nail polish Creams Total Beginning inventory $ 13.5 $ 11.0 $ 1.0 $ Budgeted sales and production $ $ 11.6 $ 6.6 $ Goods available for sale $ 31.5 $ 22.6 $ 7.6 $ Less Actual Sales $ 16.5 $ 11.2 $ 6.4 $ Ending Inventory $ 15.0 $ 11.4 $ 1.2 $ 18.0 36.2 61.7 34.1 27.6 Converting Wholesale price to cost 2011 Nail Polish Creams Total COG Manufature Budgeted sales and Prod Auditor Cost Percentage Ending Inventory Multiplied by Auditor Cost percentage Ending Inventory 2010 Lipstick Nail Polish Creams Total $ 16.3 $ 9.9 $ 3.7 S $ 18.0 $ 11.6 $ 6.6 $ 85% 75% 55% $ 15.0 $ 11.4 $ 1.2 $ $ 13.6 $ 9.6 $ 0.7 $ $ 13.6 $ 9.6 $ 0.7 $ Lipstick 29.9 36.2 77% 27.6 23.9 23.9 2011 Nail polish Creams Total Schedule B: Statement of Cost of Goods Sold 2010 COGS Calculation Lipstick Nail polish Creams Total Variable Manufacturing Costs $ 15.3 $ 9.3 $ 3.3 $ Plus Fixed Manufacturing Costs $ 1.0 $ 0.6 $ 0.4 $ Total COG Manufacturing $ 16.3 $ 9.9 S 3.7 $ Plus Beginning Inventory $ 12.2 $ 8.2 $ 0.6 $ COG Available for sale $ 28.5 $ 18.1 $ 4.3 $ Less ending inventory $ 13.6 S 9.6 $ 0.7 $ COGS $ 14.9 $ 8.5 $ 3.6 $ Lipstick 27.9 2.0 29.9 21.0 50.9 23.9 27.0 Schedule C: Income Statement Schedule E: Balance Sheet 2010 Budget 2011 S Sales Less COGS Gross Margin Marketing and Promotion General Administration Total Marketing and G&A Expense Operating Income Interest Expense Pretax net income $ $ $ S $ $ 2010 Budget 2011 34.1 27.0 7.1 3.6 1.3 4.9 2.2 1.8 0.4 Assets: Cash Miscellaneous Current Assets Inventory Total Current Assets Property and Equipment Goodwill Total PPE and Intangible Assets Total assets 5.5 3.0 23.9 32.4 12.2 9.3 21.5 53.9 $ $ $ S S $ $ $ Liabilities: Miscellaeous Current Liabilities Bank Loan Payable Total Liabilities $ S $ 4.0 26.3 30.3 Stockholders Equity: Common Stock $ Retained Earnings $ Total Stockholders Equity $ Total Liabilities and Stockholders Equity $ 12.5 11.1 23.6 53.9 Schedule D: Cash Flow Statement 2010 Budget 2011 Cash Flow from Operations Cash Receipts From Customers Total Cash Receipts $ $ 34.1 34.1 Cash Disbursements Variable Manufacturing Costs Fixed Manufacturing Costs Marketing and Promotion General Administration Interest Total Disbursements Cash Flow from Operations $ $ $ $ S $ $ 27.9 1.0 3.6 1.3 1.8 35.6 (1.5) Cash flow from Investing Cash Flow from Financing Increase (decrease) in Bank Loan Net Change in Cash Beginning cash balance Ending Cash balance $ $ 7.0 5.5