Directions: Click the "Case-link" displayed above and use the information provided in Hearth and Home, Parts A and B to answer this questions In a best-case scenario, you might assume that the failure of a troubled competitor early in the fiscal year enables Hearth and Home to raise its selling prices 8 percent above its anticipated level. If so, which of the following hypotheses would be the most reasonable? Cost of poods sold increase and A pes de percentages of sales Both cost of poods told and S p ees as percentages of sales decrease SG Expenses increase and cost of goods sold decrease percentages of sales Cost of poods and bothman constant percentages of sales Hearth and Home Part A Company Information Hearth and Home sells, installs, and services residential fireplaces. Formed 22 years ago by Len Wilkinson as a retailer of fireplaces and accessories, the company installed virtually all of the fireplaces it sold and guaranteed its work for 10 years. The company built a reputation for prompt, quality workmanship and gradually, starting six years ago, several of the area's leading contractors began to subcontract chimney and fireplace installation to Hearth and Home. During its carly years, most of the company's sales took place from October to March. As it expanded, subcontracting sales occurred throughout the year, though slightly more in the summer months. Sales are now fairly evenly divided between retail and subcontracting The Wilkinsons have financed the company with long-term debt. The family has provided term loans totaling $350,000, and your organization has provided $200,000 in long-term debt. Your organization also made available to the company what is now a $400,000 revolving credit. H and H may borrow up to 50 percent of receivables outstanding for less than 60 days and up to 40 percent of inventory, excluding inventory work in process. The company must be out of debt for 30 consecutive days during the second quarter of every calendar year. Until the end of 20Y3, the company was a model customer, meeting the second-quarter 30-day clean-up requirement fairly easily in 20Y1 and 20Y2. At the end of fiscal 20Y3, however, the company was unable to clean up the line. In fact, at the end of June, the outstanding balance was $101,000, the company having been unable to reduce the line significantly below $100,000 at any time during the entire second quarter. The balance outstanding on the last day for which you have data was $153,000 John Holmgren is the lender responsible for the relationship, and he has asked you for assistance in deciding how to handle the loan. When the company could not meet the cleanup requirement, John waived the requirement based on the company's past history and performance. In John's opinion, H and H's management has such high integrity that your organization will be able to recover its money, he believes that the owners would sell their houses if necessary to repay the debt. Having said that, John is also aware that the owning family depends upon dividend income and considers an annual dividend of at least $80,000 to be mandatory. John is feeling the dissatisfaction of credit management, which is unhappy with his decision to waive the clean-up. He needs to come up with a solution to the problem that will meet both the company's and your organization's needs. As you and John discuss the situation, he tells you that H and H's management expects sales to Increase significantly in 20Y4 and that part of that increase will be due to additional contracting - mainly repairing older installations by a couple of competitors that have since gone out of business. The Wilkinsons have proposed that the limit on the revolving credit be increased to $500,000 Hearth and Home Part B Hearth and Home Balance Sheets (in $000s) As At June 30: 2013 2012 2011 123 $ ASSETS Current assets Cash Accounts receivable Inventory Other current assets Total current assets 66 376 100 240 547 107 1,096 Fixed assets 313 Trademarks and goodwill 107 71 71 TOTAL ASSETS $ 1,190 67 LIABILITIES AND OWNERS' EQUITY Current liabilities Current portion-LTD Notes payable Accounts payable Accrued expenses Other current liabilities Total current liabilities 244 Long-term debt Other noncurrent liabilities Owners' equity 639 389 TOTAL LIABILITIES AND OWNERS' EQUITY $ 1,516 $ 1,285 $ 1.190 Working investment $ 610 $ 496 $ 452 Hearth and Home Part B Hearth and Home Income Statements (in $000s) Years Ended June 30: $ 2093 3,570 2,467 1.103 $ Sales Cost of goods sold Gross profit 2012 3,000 2,093 907 $ 2011 2,500 1.773 727 36 Interest expense Depreciation expense Operating expense Profit before taxes 477 371 270 345 Taxes 108 Net profit after taxes Dividends Earnings retained $ 138 $ 112 $ 97 Part B Hearth and Home Quick Cash Flow (in $000s) Company Name: Hearth and Home WI GFA (U) (U) S S 144) 204 179 Net profit Plus: Depreciation, amortization expense Plus (or less): A Working investment Equals: Cash after operating cycle Plus (or less): A Gross fixed assets Equals: Cash after capital investment cycle Less: Dividends declared Equais: Cash available for all debt repayment 12 192) 192 1951 1 108 167) 167) ENDING BEGINNING 240 417 148 57 452 461 204 54 496 452 20Y2 BEGINNING 303 ENDING 376 Less: Current portion long-term debt (prior year) Equals: Cash available for other debt repayment Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment Less: Ending working investment Equals: A Working investment Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment 496 Less: Ending working investment 610 Equals: A Working investment (114) Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment 204 244 6469 496 610 2013 ENDING BEGINNING Beginning working investment Less: Ending working investment Equals: A Working investment Are any changes in income taxes payable, interest payable, prepaid expenses, investments, or miscellaneous other accounts large enough to distort quick cash flow