Complete the shaded boxes.

Jamie Matthews couldn't believe it had been four years since

she founded EcoBags, Inc. The firm manufactures industrial

bags called flexible intermediate bulk containers (FIBCs)

in a rented facility in the Chicago suburb of Woodlawn and

operates as an Illinois S-corporation. It was March 2018, and

EcoBags recently wrapped up its fiscal year-end reporting for

the 2017 calendar year. Management was finalizing financial

and manufacturing plans for 2018.FIBCs have become a popular means for shipping and storing

industrial products over the past 20 years. The standard FIBC

is 35" 35" 40" with handles so that the bags can be moved

by forklifts. Figure 1 depicts the standard FIBC.

The bags' popularity and simple construction have led to

significant market competition. Recently, firms have developed

FIBCs from woven polypropylene plastic. The polypropylene

bags have a longer useful life and are easier to clean than

the traditional cloth bags. Further, the plastic weave allows

materials to be washed and drained in placean attractive

feature for many of the bags' applications. While polypropylene

bags have become the industry standard, other manufacturers

require virgin plastic to make their bags. Five years ago,

however, Jamie developed a proprietary and patented process to

fuse recycled polypropylene sheets into FIBCs. While the bags

are slightly more expensive than other plastic FIBCs, they have

become popular because of their environmental sustainability.

Jamie founded the business with a personal investment

of US$100,000. Additionally, she secured funding from

Horizon Capital Partners, a private equity firm that invests in

startups focused on sustainable products. Horizon contributed

US$500,000 in exchange for a 20% equity stake in EcoBags.

CURRENT SITUATION

Through cautious and steady growth, the business has

expanded to approximately US$5 million in revenues for

the year ended December 31, 2017. EcoBags has financed

operations using the initial equity investments and cash

from operations. After two years of initial losses, EcoBags

generated net income in 2016 and 2017.

Jamie believed the firm was ready for faster growth and

considered expanding the firm's product line and geographic

footprint. However, the firm needed additional equipment

to achieve this growth. Horizon has expressed a willingness

for an additional equity investment; however, Jamie would

prefer not to dilute her ownership interest. Accordingly, she

approached several banks about providing debt to finance

capital investments.

DEBT FINANCING

Jamie received proposals from several banks, but First Federal

Bank seems to be the best option based on EcoBags needs.

The proposed loan is for US$1.5 million over four years at a 7%

annual rate. The loan requires monthly interest payments, but

the principal is not repaid until the end of the four-year term.

The loan is expected to commence on July 1, 2018.The loan has several covenants, including restricting

dividends payouts (except to fund pass-through income tax

payments to shareholders). Further, the covenants require

that the debt-to-equity ratio not exceed four-to-one based on

generally accepted accounting principles (GAAP) financial

statements. In the event of a covenant violation, First Federal

can call the loan before its four-year term. The loan's principal

will represent the firm's only debt (short-term liabilities are

excluded from the debt-to-equity calculation). As noted in

Table 1, the firm's equity as of December 31, 2017 totals

US$195,700. Accordingly, EcoBags will need to generate

significant net income in 2018 to avoid a violation.

PLANNING FOR 2018

Jamie is adept at financial analysis and manufacturing

costing. Before founding EcoBags, she worked as a cost

analyst in the packaging industry. Although Jamie believes

the firm is well-positioned for growth (with the anticipated

bank loan), she thinks that 2018 will be flat in sales revenues

and most related costs.

Standard costing is used for planning and control

purposes, and Jamie documented the following baseline

assumptions for 2018:

Standard costs are based on a denominator level of 20,000

units (10 bags per unit).

1.1 million yards of raw material will be purchased at

US$2.50 per yard.

No purchase price, material usage, or spending variances

are expected.

Direct labor and manufacturing overhead are expected to be

fixed within a production range of 15,000 to 22,000 units.

Units are expected to sell at an average wholesale price of

US$320.

20,000 units will be manufactured, and 17,000 will be

sold. The manufacturing and inventory assumptions are

documented in Exhibit A (under the "Status Quo" scenario).

Operating expenses are expected to be US$1,785,000

(excluding interest expense).

Additionally, Jamie is considering inventory reductions

to reduce working capital and fund future expansion. This

effort would create the following changed assumptions:

16,000 units will be manufactured, and 17,000 will be sold. These manufacturing and inventory assumptions are documented in Exhibit A (under the "Inventory Reduction Effort" scenario).

750,000 yards of raw material will be purchased at US$2.50 per yard.

Expected production volume variances are closed directly to cost of goods sold (COGS).