2. Conduct a sensitivity analysis, decreasing sales 2%, 5%, and 10% for April through August. New sales levels are provided in Exhibit 2. Adjust the financing and cash needs at these new sales levels.

3. Determine a credit recommendation for Kent Bank, to lend or not. Be prepared to justify your credit decision.

LAF has requested a line of credit of US$60,000 to cover production costs during the seasonal increase in business, Kent Bank uses the following terms on its lines of credit. All borrowing is done at the beginning of the month in whole dollar increments. All repayments are made at the end of the month in whole dollar increments. The full line of credit is expected to be paid off by the end of the quarter with all the interest repaid at the end of the quarter. The interest rate on this loan is 16% per year. REQUIRED The flags are made in one plan, which has a capacity of 6,200 units per month. LAF budgets have 20% of next month's sales in finished goods inventory at the end of each month. There is plenty of storage space for finished goods. Fabric is the only direct material and each flag requires five pounds of fabric at US$7 per pound. LAF plans to have 40% of next month's fabric needs on hand at the end of the month. Fabric is purchased on credit with 40% paid in the month of purchase and 60% paid the next month. The standard direct labor hours to manufacture one flag is 0.50 hours at US$40 per hour. For simplicity, direct labor costs are budgeted as if they were paid when incurred. Manufacturing overhead rates are computed quarterly and applied based on direct labor hours. Fixed manufacturing overhead costs are estimated to be US$57,950 per month, of which US$20,000 is property, plant, and equipment (PPE) depreciation. Variable manufacturing overhead, including indirect materials, indirect labor, and other costs, is estimated at US$10 per direct labor hour. The selling and administrative expenses include variable selling costs (primarily shipping) of US$1.25 per unit and fixed costs of US$63,000 per month, of which US$10,000 is depreciation of the administrative office building and equipment FINANCIAL STATEMENT DETAILS AND CASH PLANNING 1. Using the data input provided (Exhibit 1), prepare LAF's master budgets in Excel. Do not hard-code numbers into the spreadsheet, except in the financing section of the cash budget 2. Conduct a sensitivity analysis, decreasing sales 2%,5%, and 10%-for April through August. New sales levels are provided in Exhibit 2. Adjust the financing and cash needs at these new sales level. 3. Determine a credit recommendation for Kent Bank, to lend or not. Be prepared to justify your credit decision. 4. Explain-why the hedger is more important to be then the accounting net income when determining credit decision 5. Fixplain why decremerin salesisexamined in semsitivity analysis for credit decision LAF uses first in, first out (FIFO) inventory valuation. As of March 31, the expected finished goods inventory is 410 units, valued at US$75 per unit. The company expects to have 4,600 pounds of fabric on hand valued at US$7 per pound. Other expected account balances include accounts payable at US$55,000, accounts receivable at 132,000, cash at US$37,745, land at US$520,000, and building and equipment at US$1,800,000 with accumulated depreciation of US$750,000. LAF has no long-term debe; common stock is valued at US$500,000 and is not expected to change during the quarter, expected retained earnings as of March 31 are US$1,247,695. LAF budgets for US$30,000 ending cash balance cach month and is requesting a line of credit that will allow it to adjust for its cash needs. The dividends of US$15,000 are paid each month. During the quarter, LAF planned to purchase equipment in May and June for US$47,820 and US$154,600, respectively. This equipment is being purchased to increase capacity and is not expected to come on line until after the quarter, thus not affecting the manufacturing overhead costs. ABOUT IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession, Globally, IMA supports the profession through research, the CMA (Certified Management Accountant) program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 100,000 members in 140 countries and 300 professional and student chapters. Headquartered in Montvale, NJ., USA, IMA provides localired services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/India. For more information about IMA, please visit www.imanet.org IMA EDUCATIONAL CASE JOURNAL VOL. 11, NO. 4, ART. 4. DECEMBER 2016 Exhibit 1. Excel Data Input Section A B A Input Data (USS) 1 30 31 2 3 4 Selling & Administrative S&A Costs Variable S&A cost per unit sold Fred S&A cost per month Depreciation in fixed S&A cost US$1.25 US$63.000 Expected 2500 6.000 US$10,000 5 Budgeted Sales Apriljunits May units June units July units August (units! 6 32 33 34 35 36 37 38 7 8 9 2.500 2.000 Other Cash Outflows Cash dividends paid each month Equipment purchases May Equipment purchases June US$15,000 US$47,820 US$154,500 10 Selling price/unit US$120.00 11 12 41 Desired Ending Inventory Furnished goods Raw materials 20% 42 13 14 Cash Collection Pattern Month of sale Following month Uncollectible 40% 55% US$30,000 15 5% 16 Beginning Account Balances on March 31 17 45 16 47 18 Cash Payments for Materials Month of purchase Following month 18 40% 50% US$37,745 US$132.000 US$30,750 US$75.00 19 20 21 19 50 51 Accounts receivable Finished goods inventory at US$75/unit) Finished goods cost per unit Finished goods inventory units Raw materials at US$7.00/b) Raw materials Accounts payable 410 5 52 22 23 24 25 28 US$32.200 4,500 US$55,000 Production Requirements Raw material per unit lib. Raw material cost perib Direct labor hours per unit Direct labor rate per hour Variable manufacturing overhead rate per direct labor hour Fund manufacturing overhead cost per month Depreciation in Fixed manufacturing overhead US$7.00 05 US$40.00 US$10 54 55 27 US$57.950 US$20.000 56 57 58 59 Land Buildings and equipment Accumulated depreciation Common stock Retained earnings US$520,000 US$1,800,000 US$750,000 US$500,000 US$1.247,895 29 Exhibit 2. Sales at Different levels 2% 10% Expected 2.500 5.000 Budgeted Sales April units) May (unit) June units) July units) August (units) 2.450 5.880 2.900 Decreased by 5% 2,375 5.700 2.850 2.375 1.900 3.000 2.500 2.000 2.250 5.000 2.700 2.250 1.800 2.450 M LAF has requested a line of credit of US$60,000 to cover production costs during the seasonal increase in business, Kent Bank uses the following terms on its lines of credit. All borrowing is done at the beginning of the month in whole dollar increments. All repayments are made at the end of the month in whole dollar increments. The full line of credit is expected to be paid off by the end of the quarter with all the interest repaid at the end of the quarter. The interest rate on this loan is 16% per year. REQUIRED The flags are made in one plan, which has a capacity of 6,200 units per month. LAF budgets have 20% of next month's sales in finished goods inventory at the end of each month. There is plenty of storage space for finished goods. Fabric is the only direct material and each flag requires five pounds of fabric at US$7 per pound. LAF plans to have 40% of next month's fabric needs on hand at the end of the month. Fabric is purchased on credit with 40% paid in the month of purchase and 60% paid the next month. The standard direct labor hours to manufacture one flag is 0.50 hours at US$40 per hour. For simplicity, direct labor costs are budgeted as if they were paid when incurred. Manufacturing overhead rates are computed quarterly and applied based on direct labor hours. Fixed manufacturing overhead costs are estimated to be US$57,950 per month, of which US$20,000 is property, plant, and equipment (PPE) depreciation. Variable manufacturing overhead, including indirect materials, indirect labor, and other costs, is estimated at US$10 per direct labor hour. The selling and administrative expenses include variable selling costs (primarily shipping) of US$1.25 per unit and fixed costs of US$63,000 per month, of which US$10,000 is depreciation of the administrative office building and equipment FINANCIAL STATEMENT DETAILS AND CASH PLANNING 1. Using the data input provided (Exhibit 1), prepare LAF's master budgets in Excel. Do not hard-code numbers into the spreadsheet, except in the financing section of the cash budget 2. Conduct a sensitivity analysis, decreasing sales 2%,5%, and 10%-for April through August. New sales levels are provided in Exhibit 2. Adjust the financing and cash needs at these new sales level. 3. Determine a credit recommendation for Kent Bank, to lend or not. Be prepared to justify your credit decision. 4. Explain-why the hedger is more important to be then the accounting net income when determining credit decision 5. Fixplain why decremerin salesisexamined in semsitivity analysis for credit decision LAF uses first in, first out (FIFO) inventory valuation. As of March 31, the expected finished goods inventory is 410 units, valued at US$75 per unit. The company expects to have 4,600 pounds of fabric on hand valued at US$7 per pound. Other expected account balances include accounts payable at US$55,000, accounts receivable at 132,000, cash at US$37,745, land at US$520,000, and building and equipment at US$1,800,000 with accumulated depreciation of US$750,000. LAF has no long-term debe; common stock is valued at US$500,000 and is not expected to change during the quarter, expected retained earnings as of March 31 are US$1,247,695. LAF budgets for US$30,000 ending cash balance cach month and is requesting a line of credit that will allow it to adjust for its cash needs. The dividends of US$15,000 are paid each month. During the quarter, LAF planned to purchase equipment in May and June for US$47,820 and US$154,600, respectively. This equipment is being purchased to increase capacity and is not expected to come on line until after the quarter, thus not affecting the manufacturing overhead costs. ABOUT IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession, Globally, IMA supports the profession through research, the CMA (Certified Management Accountant) program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 100,000 members in 140 countries and 300 professional and student chapters. Headquartered in Montvale, NJ., USA, IMA provides localired services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/India. For more information about IMA, please visit www.imanet.org IMA EDUCATIONAL CASE JOURNAL VOL. 11, NO. 4, ART. 4. DECEMBER 2016 Exhibit 1. Excel Data Input Section A B A Input Data (USS) 1 30 31 2 3 4 Selling & Administrative S&A Costs Variable S&A cost per unit sold Fred S&A cost per month Depreciation in fixed S&A cost US$1.25 US$63.000 Expected 2500 6.000 US$10,000 5 Budgeted Sales Apriljunits May units June units July units August (units! 6 32 33 34 35 36 37 38 7 8 9 2.500 2.000 Other Cash Outflows Cash dividends paid each month Equipment purchases May Equipment purchases June US$15,000 US$47,820 US$154,500 10 Selling price/unit US$120.00 11 12 41 Desired Ending Inventory Furnished goods Raw materials 20% 42 13 14 Cash Collection Pattern Month of sale Following month Uncollectible 40% 55% US$30,000 15 5% 16 Beginning Account Balances on March 31 17 45 16 47 18 Cash Payments for Materials Month of purchase Following month 18 40% 50% US$37,745 US$132.000 US$30,750 US$75.00 19 20 21 19 50 51 Accounts receivable Finished goods inventory at US$75/unit) Finished goods cost per unit Finished goods inventory units Raw materials at US$7.00/b) Raw materials Accounts payable 410 5 52 22 23 24 25 28 US$32.200 4,500 US$55,000 Production Requirements Raw material per unit lib. Raw material cost perib Direct labor hours per unit Direct labor rate per hour Variable manufacturing overhead rate per direct labor hour Fund manufacturing overhead cost per month Depreciation in Fixed manufacturing overhead US$7.00 05 US$40.00 US$10 54 55 27 US$57.950 US$20.000 56 57 58 59 Land Buildings and equipment Accumulated depreciation Common stock Retained earnings US$520,000 US$1,800,000 US$750,000 US$500,000 US$1.247,895 29 Exhibit 2. Sales at Different levels 2% 10% Expected 2.500 5.000 Budgeted Sales April units) May (unit) June units) July units) August (units) 2.450 5.880 2.900 Decreased by 5% 2,375 5.700 2.850 2.375 1.900 3.000 2.500 2.000 2.250 5.000 2.700 2.250 1.800 2.450 M