CHALLENGE Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The company expects earnings after taxes during the next year to equal $400,000. During the past several years, the company has been paying $50,000 in dividends to its stockholders. The company expects to continue this policy for at least the next year. The actual balance sheet and income statement for Baldwin during 2016 follow.

a. Using the percentage of sales method, calculate the additional financing Baldwin Products will need over the next year at the $6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2017, assuming that a sales level of $6 million is reached. Assume that the additional financing needed is obtained in the form of additional notes payable.

b. Suppose that the Baldwin Products management feels that the average collection period on its additional salesthat is, sales over $4 millionwill be 60 days, instead of the current level. By what amount will this increase in the average collection period increase the financing needed by the company over the next year?

c. If the Baldwin Products banker requires the company to maintain a current ratio equal to 1.6 or greater, what is the maximum amount of additional financing that can be in the form of bank borrowings (notes payable)? What other potential sources of financing are available to the company?

Baldwin Products Company Balance Sheet as of December 31, 2016 \begin{tabular}{lrlr} \hline Cash & $200,000 & Accounts payable & $600,000 \\ Accounts receivable & 400,000 & Notes payable & 500,000 \\ Inventories & 1,200,000 & Long-term debt & 200,000 \\ Fixed assets, net & 500,000 & Stockholders' equity & 1,000,000 \\ \multicolumn{1}{c}{ Total assets } & $2,300,000 & Total liabilities and equity & $2,300,000 \\ \hline \end{tabular} Details