Bazinga Inc. In mid-October 2022, the top managers of Bazinga Inc., a leading scooter manufacturer, were gathered in the president's conference room reviewing the results of the company's operations during the past fiscal year-which runs from October 1 to September 30. "Not a bad year, on the whole,' remarked the president, Sheldon Cooper. "Sales were up, profits were up, and our return on equity was a respectable 15%. In fact, the only dark spot I can find in our whole annual report is the profit-to-sales ratio, which is only 2.25%. Seems like we should be making more than that, don't you think Leonard?" He looked across the table at the VP of Finance, Leonard Hofstatder. "I agree," replied Leonard, "and I'm glad you brought it up, because I have a suggestion on how to improve that situation." He leaned forward in his chair as he realized he had captured everyone's attention. "The problem is, we have too many expenses on our income statement that are eating up the profits. Now I've done some checking, and the expenses all seem to be legitimate except for interest expense. We paid over $250,000 last year to the bank just to finance our short-term operations. If we could have kept that money instead, our profit-to-sales ratio would have been 4%, which is higher than that of any other firm in our industry." "But, Leonard, we have to borrow like that," responded Raj Howard, the VP of Production. "After all, our sales are seasonal, with almost all occurring between March and September. Since we don't have much money coming in from October to February, we have to borrow to keep the production line going." "Right," Leonard replied, "and it's the production line that's the problem. We produce the same number of products every month, no matter what we expect sales to be. This causes inventory to build up when sales are slow and begin to deplete when sales pick up. That fluctuating inventory causes all sorts of problems, not the least of which is the excessive amount of borrowing we have to do to finance the inventory accumulation." "Now, here's my idea," said Leonard. "Instead of producing 500 scooters a month, every month, we match the production schedule with the sales forecast. For example, if we expect to sell 150 scooters in October, then we only make 150 scooters. That way, we avoid borrowing to make the 350 more that we don't expect to sell, anyway. Over the course of an entire year, the savings in interest expense could really add up." "Hold on, now" Raj responded, feeling that his territory was being threatened. "That kind of scheduling really messes things up in the shop where it counts. It causes a feast or famine environment - nothing to do for one month, then a huge workload the next. It's terrible for the employees, not to mention the supervisors who are trying to run an efficient operation. Your idea may make the income statements look good now, but the whole company will suffer in the long run." Sheldon intervened. "OK, you guys, calm down. Leonard may have a good idea, or he may not, but at least it's worth looking into. I propose that you all work up two sets of figures, one assuming level production and one matching production with sales. We'll look at them both and see if Leonard's idea really does produce better results. If it does, we'll check it further against the other issues Raj is concerned about and then make a decision on which alternative is better for the firm." The following tables contain the financial information you will need to complete your analysis. Table 1-Sales Forecast (each unit sells for $6,500) Month Sales in Units Sales in $ Month Sales in Units Sales in $ October 250 $1,625,000.00 April 650 $4,225,000.00 November 80 $520,000.00 May 1,100 $7,150,000.00 December 15 $ 97,500.00 June 1,200 $7,800,000.00 January 0 $ July 1,100 $7,150,000.00 February 5 $ March 400 32,500.00 $2,600,000.00 August 500 $3,250,000.00 September 250 $1,625,000.00 Question 1-level production a. Generate a monthly production and inventory schedule in units assuming level production of 500 units per month. Beginning inventory in October is 200 units. Each scooter costs $2,500 per unit to produce. Use the sales forecast projected in Table 1 for breakdown of units sold per month. b. Prepare a monthly schedule of cash receipts. Of each month's sales, 15% are cash and 85% are on credit (accounts receivables). All accounts receivables are collected in the month after the sale is made. Total sales for the prior September were $1,500,000. c. Generate a cash payment schedule for October through September. The production cost of $2,500 per scooter are paid for in the month in which they occur (i.e., if they produce 250 scooters, they pay $2,500 x 250 = $625,000 in production cost for that month). Other cash payments, besides those for production costs, are $225,000 per month. d. Prepare a monthly cash budget for October through September. The beginning cash balance is $125,000, and that is also the minimum cash balance desired each month. The cumulative loan balance to start the year in October is zero ($0). Question 2-seasonal production a. Generate a monthly production and inventory schedule in units assuming seasonal production as per Leonard's suggestion. In this case, the monthly production will equal the sales in units. Beginning inventory in October is still 200 units. Each scooter costs $2,500 per unit to produce. Use the sales forecast projected in Table 1 for breakdown of units sold per month. b. At this point, we must consider inefficiencies that have been introduced because of going from level to seasonal production. Assume that there are added expenses related to switching to seasonal production and the other cash payments (other than production costs) are $350,000 per month instead of $225,000. Prepare the amended cash payment schedule (like in c above) AND cash budget for October to September (like in d above). The cumulative loan balance to start the year in October is zero ($0). Question 3 Given that Bazinga Inc. is charged 12% annual interest (1% per month) on its cumulative loan balance each month, how much would Leonard's suggestion save in interest expense in a year? To determine this, multiply the cumulative loan total for the month by 1% (if the cumulative total for the month is zero, then there is zero interest to be paid for the month). Add these totals for each month to get the total amount of interest charged to Bazinga Inc. Complete this exercise for both the level production and seasonal production. Question 4 If you were in Sheldon's position, would you continue to use level production, or, switch to seasonal production? Use all the information available in this case, as well as everything you know making decisions as a financial manager. Make sure you explain your reasoning behind the decision.