Hi! Can someone please create a result analysis? I already have the computations, but please check if it is correct. Thank you!
Gale Force Surfing During mid-September 2015, the top managers of the Gale Force Corporation, a leading manufacturer of windsurfing equipment and surfboards, 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, 32-year-old Charles (Chuck) Jamison. Sales were up, profits were up, and our return on equity was a respectable 15 percent. In fact, he continued, the only dark spot I can find in our whole annual report is the profit margin, which is only 2.25 percent. Seems like we ought to be making more than that, don't you think, Tim? He looked across the table at the vice president for finance, Timothy Baggit, age 28. I agree, replied Tim, 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 the interest of the others. 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. Look here, we paid over $250,000 last year to the bank just to finance our short-term borrowing. If we could have kept that money instead, our profit margin ratio would have been 4.01 percent, which is higher than any other firm in the industry. But, Tim, we have to borrow like that, responded Roy (Pop) Thomas, age 35, the vice president for 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, Tim 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 to deplete when sales pick up. That fluctuating inventory causes all sorts of problems, including the excessive amount of borrowing we have to do to finance the inventory accumulation. (See Tables 1 through 5 for details of Gale Force's current operations based on equal monthly production.) Table 1 Sales Forecast (in units) First Quarter Second Quarter Third Quarter October 2014...... 150 January..... 0 April........ 500 November........... 75 February.. 0 May.... 1,000 December 25 March 300 June... 1,000 Fourth Quarter July .... .1,000 August .... 500 September 250 Table 2 Production Schedule and Inventory (equal monthly production) + + October 2014.... November........... December January .... February March .... April ...... May. June July ........ August .... September..... Beginning Inventory 400 650 975 1,350 1,750 2,150 2,250 2,150 1,550 950 350 250 Production This Month 400 400 400 400 400 400 400 400 400 400 400 400 Sales 150 75 25 0 0 0 300 500 1,000 1,000 1,000 500 250 End Inventory 650 975 1,350 1,750 2,150 2,250 2,150 1,550 950 350 250 400 Inventory ($2,000 per unit) $1,300,000 1,950,000 2,700,000 3,500,000 4,300,000 4,500,000 4,300,000 3,100,000 1,900,000 700,000 500,000 800,000 Table 3 Sales Forecast, Cash Receipts and Payments, and Cash Budget October 2014 November February March December January Sales Forecast 25 Sales (units)....... Sales (unit price: $3,000). 150 $ 450,000 50% cash ........ 50% from prior month's sales* ....... Total cash receipts.. $ 225,000 $ 375.000 $ 600,000 Production in units ......... Production costs (each = $2,000) Overhead ........... Dividends and interest Taxes .......... Total cash payments. 400 $ 800,000 $ 200,000 0 $ 150,000 $ 1,150,000 75 0 0 300 $ 225,000 $ 75,000 0 0 $ 900,000 Cash Receipts Schedule $ 112,500 $ 37,500 $ 450,000 $ 225,000 $ 112,500 $ 37,500 0 0 $ 337,500 $ 150,000 $ 37,500 0 $ 450,000 Cash Payments Schedule 400 400 400 400 400 $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 0 0 0 0 0 0 0 0 $ 150,000 0 $ 1,000,000 $ 1,000,000 $ 1,150,000 $ 1,000,000 $1,000,000 Cash Budget; Required Minimum Balance is $125,000 -662,500 -850,000 -1,112,500 -1,000,000 -550,000 125.000 125,000 125,000 125.000 125.000 -537,500 -725,000 -987,500 -875,000 -425,000 $ 662,500 $ 850,000 $ 1,112,500 $ 1,000,000 $ 550,000 0 Cash flow ...... Beginning cash Cumulative cash balance.. Monthly loan or (repayment) Cumulative loan ..... Ending cash balance...... $ -550,000 125.000 -425,000 $ 550,000 $ 550,000 $ 125,000 $ 1,212,500 $ 125,000 $ 2,062,500 $ 125,000 $ 3,175,000 $ 125,000 $ 4,175,000 $ 125,000 $ 4,725,000 $ 125,000 *September sales assumed to be $750,000. 99 Now, here's my idea, said Tim. "Instead of producing 400 items a month, every month, we match the production schedule with the sales forecast. For example, if we expect to sell 150 windsurfers in October, then we only make 150. That way we avoid borrowing to make the 250 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, Pop responded, feeling that his territory was being threatened. That kind of scheduling really fouls up things in the shop where it counts. It causes a feast or famine environmentnothing to do for one month, then a deluge 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 for now, but the whole company will suffer in the long run. Chuck intervened. OK, you guys, calm down. Tim 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 Tim's idea really does produce better results. If it does, we'll check it further against other issues Pop is concerned about and then make a decision on which alternative is better for the firm. Table 3 (continued) April May June July August September Sales Forecast Sales (units) Sales (unit price: $3,000)... 500 $1,500,000 250 $ 750,000 50% cash...... 50% from prior month's sales ........ Total cash receipts $ 750,000 $ 450,000 $1,200,000 $ 375,000 $ 750,000 $ 1,125,000 Production in units.. Production costs (each = $2,000)... Overhead...... Dividends and interest. Taxes....... Total cash payments 400 $ 800,000 $ 200,000 0 $ 150,000 $1,150,000 1,000 1,000 1,000 500 $3,000,000 $3,000,000 $3,000,000 $1,500,000 Cash Receipts Schedule $1,500,000 $1,500,000 $1,500,000 $ 750,000 $ 750,000 $1,500,000 $1.500.000 $1,500,000 $2,250,000 $3,000,000 $3,000,000 $2,250,000 Cash Payments Schedule 400 400 400 400 $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 0 0 0 $1,000,000 0 $ 300,000 $1,000,000 $1,000,000 $1,300,000 $2,000,000 Cash Budget; Required Minimum Balance is $125,000 1,250,000 2,000,000 1,700,000 250,000 125,000 125.000 125.000 400,000 1,375,000 2,125,000 1,825,000 650,000 ($1,250,000) ($2,000,000) ($1,425,000) 0 $3,425,000 $1,425,000 0 0 $ 125,000 $ 125,000 $ 400,000 $ 650,000 400 $ 800,000 200,000 0 $1,000,000 Cash flow... Beginning cash Cumulative cash balance Monthly loan or (repayment) Cumulative loan... Ending cash balance 50,000 125,000 175,000 ($ 50,000) $4,675,000 $ 125,000 125,000 650.000 775,000 0 0 $ 775,000 Table 4 Total Current Assets First Year Accounts Receivable* Total Current Assets Cash Inventory = October............. $125,000 + $225,000 November............ 125,000 112,500 December 125,000 37,500 January 125,000 0 February 125,000 0 March ..... 125,000 450,000 April ........... 125,000 750,000 May 125,000 1,500,000 June 125,000 1,500,000 July... 400,000 1,500,000 August ......... 650,000 750,000 September............. 775,000 375,000 * Equals 50 percent of monthly sales + $1,300,000 1,950,000 2,700,000 3,500,000 4,300,000 4,500,000 4,300,000 3,100,000 1,900,000 700,000 500,000 800,000 $1,650,000 2,187,500 2,862,500 3,625,000 4,425,000 5,075,000 5,175,000 4,725,000 3,525,000 2,600,000 1,900,000 1,950,000 Cumulative loan balance and interest expense (1% per month) October November December January February March Cumulative loan balance .......... $ 550,000 $1,212,500 $2,062,500 $3,175,000 $4,175,000 $4,725,000 Interest expense at (prime, 8.0%, +4.0%) 12.00%.............. $ 5,500 $ 12,125 $ 20,625 $ 31,750 $ 41,750 $ 47,250 June July August September May $3,425,000 $1,425,000 0 0 0 April Cumulative loan balance. $4,675,000 Interest expense at (prime, 8.0%, +4.0%) 12.00%............... $ 46,750 Total interest expense for the year: $254,250 $ 34,250 $ 14,250 0 0 0 Quarter Table 1: Sales Forecast (in units) Second Quarter Febuary March 0 300 Third Quarter June Month First Quarter November December 25 October 150 January 0 0 75 April 500 May 1000 July 1000 Fourth Quarter August September 500 250 1000 October November June July 400 August 400 400 400 Month Beginning Inventory Production Sales 400 1,000 September 400 250 150 Table 2: Production Schedule and Inventory (equal monthly production) December January Febuary March April May 400 400 400 400 400 400 25 0 0 300 500 1,000 25 0 0 300 500 1,000 400 400 400 400 400 400 800,000 800,000 800,000 800,000 800,000 800,000 75 75 500 1,000 1,000 150 1,000 500 250 400 400 400 400 400 Ending Inventory Inventory ($2,000 per unit) 400 800,000 800,000 800,000 800,000 800,000 800,000 Table 3: Sales Forecast, Cash Receipts and Payments, and Cash Budget Particulars November December October 150 450,000.00 Sales Forecast Febuary March April May June July August 0.00 300 500 1000 1000 1000 500 0.00 900,000.00 1,500,000.00 3,000,000.00 3,000,000.00 3,000,000.00 1,500,000.00 Sales Units Total Sales 25 January 0.00 0.00 75 225,000.00 September 250 750,000.00 75,000.00 Particulars October 50% Cash 50% Remaining Total Cash Receipts 225,000.00 375,000.00 600,000.00 November 112,500.00 225,000.00 337,500.00 December 37,500.00 112,500.00 150,000.00 January 0.00 37,500.00 37,500.00 Cash Receipts Schedule Febuary March April May June July August September 0.00 450,000.00 750,000.00 1,500,000.00 1,500,000.00 1,500,000.00 750,000.00 375,000.00 0.00 0.00 450,000.00 750,000.00 1,500,000.00 1,500,000.00 1,500,000.00 750,000.00 0.00 450,000.00 1,200,000.00 2,250,000.00 3,000,000.00 3,000,000.00 2,250,000.00 1,125,000.00 December January 25 0 Particulars Production in Units Production Costs Overhead October 150 300,000.00 200,000.00 0.00 150,000.00 650,000.00 November 75 150,000.00 200,000.00 0.00 0.00 350,000.00 50,000.00 200,000.00 0.00 0.00 200,000.00 0.00 Cash Payment Schedule Febuary March April May June July August 0 300 500 1000 1000 1000 500 0.00 600,000.00 1,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 1,000,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 0.00 0.00 0.00 0.00 0.00 0.00 1,000,000.00 0.00 0.00 150,000.00 0.00 0.00 300,000.00 0.00 200,000.00 800,000.00 1,350,000.00 2,200,000.00 2,200,000.00 2,500,000.00 2,200,000.00 September 250 500,000.00 200,000.00 0.00 Dividends and Interest 0.00 Taxes Total Cash Payments 0.00 250,000.00 150,000.00 350,000.00 700,000.00 Particulars Cash Flow Beginning Cash Cumulative Cash Balance Monthly Loan Cumulative Loans Ending Cash Balance October -50,000.00 125,000.00 75,000.00 50,000.00 50,000.00 125,000.00 November December -12,500.00 -100,000.00 125,000.00 125,000.00 112,500.00 25,000.00 12,500.00 100,000.00 62,500.00 162,500.00 125,000.00 125,000.00 Cash Budget: Required Munimum Balance is 125,000 January Febuary March April May -312,500.00 -200,000.00 - 350,000.00 - 150,000.00 50,000.00 125,000.00 125,000.00 125,000.00 125,000.00 125,000.00 -187,500.00 -75,000.00 -225,000.00 -25,000.00 175,000.00 312,500.00 200,000.00 350,000.00 150,000.00 -50,000.00 475,000.00 675,000.00 1,025,000.00 1,175,000.00 1,125,000.00 125,000.00 125,000.00 125,000.00 125,000.00 125,000.00 June 800,000.00 125,000.00 925,000.00 -800,000.00 325,000.00 125,000.00 July 500,000.00 125,000.00 625,000.00 -325,000.00 0.00 300,000.00 August 50,000.00 300,000.00 350,000.00 0.00 0.00 350,000.00 September 425,000.00 350,000.00 775,000.00 0.00 0.00 775,000.00 Month October June Cash 125,000 225,000 800,000 1,150,000 Accounts Inventory Total Current Assets November 125,000 112,500 800,000 1,037,500 Table 4: Total Current Assets First Year January Febuary March April 125,000 125,000 125,000 125,000 0 0 450,000 750,000 800,000 800,000 800,000 800,000 925,000 925,000 1,375,000 1,675,000 December 125,000 75,000 800,000 1,000,000 May 125,000 1,500,000 800,000 2,425,000 125,000 1,500,000 800,000 2,425,000 July 300,000 1,500,000 800,000 2,600,000 August 350,000 750,000 800,000 1,900,000 September 775,000 375,000 800,000 1,950,000 November 62,500.00 625.00 Table 5: Cumulative Loan Balance and Interest Expense (1% per month) December January Febuary March April May 162,500.00 475,000.00 675,000.00 1,025,000.00 1,175,000.00 1,125,000.00 1,625.00 4,750.00 6,750.00 10,250.00 11,750.00 11,250.00 Month Cumulative Loan Interest Expense Total July 0.00 October 50,000.00 500.00 50,750.00 June 325,000.00 3,250.00 August 0.00 September 0.00 0.00 0.00 0.00 Month October June July November 62,500.00 625.00 August 0.00 September 0.00 0.00 December 162,500.00 1,625.00 20,625.00 19,000.00 January 475,000.00 4,750.00 31,750.00 27,000.00 Cumulative Loan Interest Expense Previous Interest Interest Savings 0.00 Interest Savings Febuary March April May 675,000.00 1,025,000.00 1,175,000.00 1,125,000.00 6,750.00 10,250.00 11,750.00 11,250.00 41,750.00 47,250.00 46,750.00 34,250.00 35,000.00 37,000.00 35,000.00 23,000.00 50,000.00 500.00 5,500.00 5,000.00 0.00 0.00 325,000.00 3,250.00 14,250.00 11,000.00 0.00 0.00 0.00 12,125.00 11,500.00 0.00 0.00 0.00
