I need one alternative that comes up with a way to decrease interest expense. And create income statement and say the risks of doing that alternative!!!!! !

Here is what I did for comparative income statement : The first one is the original level of production . The second one is the matching sales production when you do matching sales production your interest expense will be lower than the original because you won't be borrowing as much money which you would at a lower interest expense. your loan won't need to be as much as it was before because we now only take what we actually actually. The third statement shows the facts if we do 25% reduction in production with a 10% increase in the production costs. by doing that production change compared to the original level of production shows a higher net income/earnings after taxes.

manufacturer of kitesurfing equipment, were gathered in the president's conference During mid-October 20XX, the top managers of the Gale Force Corporation, a leading 1 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 report is the profit-on-sales ratio, which is only 2.25 percent. Seems like we ought to be 15 percent. In fact," he continued, "the only dark spot I can find in our whole annual making more than that, don't you think, Tim?" He looked across the table at the vice- president for finance, Timothy Baggitt, age 28. "Lagree," 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. We paid over $250,000 MINI CASE Gale Force Corporation room past year to the bank just to finance our short-term borrowing. If we could have kept that money instead our profit-on-sales ratio would have been 4.01 percent, which is higher than that of 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 be 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." (See Tables 1 through 5 for details of Gale Force's current operations based on equal monthly production.) October November December January February March 150 Sales Forecast Sales (units) Sales (unit price: $3,000).. Cash Receipts Schedule 75 25 0 0 300 $ 450,000 $ 225,000 $ 75,000 0 0 $ 900,000 50% cash $ 225,000 $ 112,500 $ 37.500 0 0 $ 450.000 50% from prior month's sales Total cash receipts 400 375.000 225,000 112,500 37,500 0 0 $ 600.000 $ 337,500 $ 150,000 $ 37.500 0 $ 450.000 Cash Payments Schedule Production in units .. 400 400 400 400 400 Production costs (each: $2.000) $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 800,000 Overhead. 200,000 200,000 200,000 200,000 200,000 200,000 Dividends and interest 0 0 0 0 0 0 Taxes.... 150,000 0 0 $ 150,000 0 0 Total cash payments $1,150,000 $1,000,000 $1,000,000 $1,150,000 $1,000,000 $1,000,000 Cash Budget (required minimum balance: $125,000) Cash flow $-550,000 662,000 -850,000 -1,112,500 -1,000,000 -550,000 Beginning cash. 125.000 125,000 125,000 125,000 125,000 125.000 Cumulative cash balance -425,000 -537,500 -725,000 -987,500 -875,000 -425,000 Monthly loan or (repayment) 550,000 662,500 850,000 1,112,500 1,000,000 550,000 Cumulative loan... 550,000 1,212,500 2,062,500 3,175,000 4,175,000 4,725,000 Ending cash balance. $ 125,000 $ 125,000 $ 125,000 $ 125,000 $ 125,000 $ 125,000 "Note: September sales assumed to be $750,000. Table 1, Part 1 Sales forecast, cash receipts and payments, and cash budget May June April August September 1.000 1.000 500 1,000 500 Sales Forecast 250 $1,500,000 $3,000,000 $3,000,000 $3,000,000 $1,500,000 $ 750,000 Sales (units)........ Sales (unit price: $3,000)....... Cash Receipts Schedule $ 750,000 $1,500,000 $1,500,000 $1,500,000 $ 750,000 $375,000 50% cash 450,000 750,000 1,500,000 1,500,000 1,500,000 750,000 50% from prior month's sales $1,200,000 $2,250,000 $3,000,000 $3,000,000 $2,250,000 $1,125,000 Total cash receipts Cash Payments Schedule 400 400 400 400 400 400 $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 800,000 200,000 200,000 200,000 $ 200,000 Production in units .. Production costs (each: $2.000)....... Overhead.. Dividends and interest 200,000 200,000 0 0 0 0 $1,000,000 $ 300,000 0 0 $ 150,000 0 0 0 Taxes Total cash payments $1,150,000 $1,000,000 $1,000,000 $1,300,000 $2,000,000 $1,000,000 Cash Budget (required minimum balance: $125,000) 50,000 1,250,000 2,000,000 1,700,000 250,000 125,000 125,000 125,000 125,000 125,000 400,000 650,000 Cash flow Beginning cash. Cumulative cash balance 175,000 1,375,000 2,125,000 1,825,000 650,000 775,000 Monthly loan or (repayment) Cumulative loan..... Ending cash balance (50,000) (1,250,000) (2,000,000) (1,425,000) 0 0 4,675,000 3,425,000 1,425,000 0 0 0 $ 125,000 $ 125,000 $ 125,000 $ 400,000 $ 650,000 $ 775,000 "Note: September sales assumed to be $750,000. Table 1, Part 2 Sales forecast, cash receipts and payments, and cash budget First Quarter October ... 150 November 75 December 25 Second Quarter January February March 0 Third Quarter April.. May June... Fourth Quarter 500 July... 1,000 August.... 1,000 September 1,000 500 250 0 300 Table 2 Sales forecast (in units) Ending Sales 150 75 25 October .... November.. December .. January February March April. May June July. August September Beginning Production Inventory This Month 400 400 650 400 975 400 1,350 400 1,750 400 2,150 400 2,250 400 2,150 400 1.550 400 950 400 350 400 250 400 0 0 300 500 1,000 1,000 1,000 500 250 Inventory Inventory ($2,000/unit) 650 $1,300,000 975 1,950,000 1,350 2,700,000 1.750 3,500,000 2,150 4,300.000 2.250 4,500,000 2,150 4,300,000 1.550 3,100,000 950 1,900,000 350 700,000 250 500,000 400 800,000 Table 3 Production schedule and inventory (equal monthly production) Accounts Receivable* $225,000 112,500 37,500 0 0 October ..... November... December.. January February March April May June July August September Cash $125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 400,000 650,000 775,000 450,000 750,000 1,500,000 1,500,000 1,500,000 750,000 375,000 Inventory $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 Total Current Assets $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 "Equals 50 percent of monthly sales Table 4 Total current assets, first year October Cumulative loan balance November December January $ 550,000 $1,212,500 $2,062,500 $3,175,000 $4,175,000 $4,725,000 February March interest expense (12.00%)... $ 5,500 $ April 12.125 $ May Cumulative loan balance Interest expense 20,625 $ 31,750 $ 41,750 $ July August June $4,675,000 $3,425,000 $1,425,000 47,250 September $ 46.750 $ 0 34.250 $ 0 Table 5 Cumulative loan balance and interest expense (1% per month 14,250 0 0 0 0 218 Pant 3 Worki one assuming month, we match the production schedule with dye sales forecast. For example, if we "Now, here's my idea," said Tim. "Instead o cing 400 items a month, every 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." a feast or famine environment nothing to do for one month, then a deluge the next. "That kind of scheduling really fouls up things in the shop where it counts. It causes "Hold on, now," Pop responded, feeling that his territory was being threatened. II'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 nor, but at least it's worth looking into. I propose that you all work up two sets of figures, glevel 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 the other issues Pop is concerned about and then make a decision on which alternative is better for the firm." level production on inventory, cash flow, loan balances, and interest expense. Tables 1 through 5 contain the financial information describing the effects of Reproduce these tables as if Tim's suggestion were implemented; that is, change the production This Month column in Table 3 from 400 each month to 150, 75, 25 , and so on, to match Sales" in the next column. Then, recompute the remainder of Table 3, and Tables 1, 4, and 5, on the basis of the new production numbers. Beginning inventory is still 400 units. Beginning cash is still $125,000 and that remains the minimum required balance. Given that Gale Force is charged 12 percent annual interest (1 percent a month) on its cumulative loan balance each month (Table 5), how much would Tim's suggestion save in interest expense in a year? Until now we have not considered any inefficiencies that have been introduced as a result of going from level to seasonal production. Assume there is an added expense for each sales dollar of 0.5 percent (0.005). On the basis of this fact and the information computed in part b, is seasonal production justified? 8. b. C. Gale Force Corporation Income Statement For Year End September 30 20xx Original Level of production Matching Sales Production $ $ Sales COGS Gross Profit Overhead Interest Expense Earnings before taxes Taxes 30% Earnings after taxes 14,400,000 9,600,000 4,800,000 2,400,000 254,250 2,145,750 643,725 1,502,025 14,400,000 9,600,000 4,800,000 2,400,000 186,500 2,213,500 664,050 1,549,450 25% reduction in production and 10% Increase in cost $ 14,400,000 10,406,000 3,994,000 2,400,000 46,100 1,547,900 464,370 $ 1,083,530 $ $ manufacturer of kitesurfing equipment, were gathered in the president's conference During mid-October 20XX, the top managers of the Gale Force Corporation, a leading 1 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 report is the profit-on-sales ratio, which is only 2.25 percent. Seems like we ought to be 15 percent. In fact," he continued, "the only dark spot I can find in our whole annual making more than that, don't you think, Tim?" He looked across the table at the vice- president for finance, Timothy Baggitt, age 28. "Lagree," 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. We paid over $250,000 MINI CASE Gale Force Corporation room past year to the bank just to finance our short-term borrowing. If we could have kept that money instead our profit-on-sales ratio would have been 4.01 percent, which is higher than that of 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 be 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." (See Tables 1 through 5 for details of Gale Force's current operations based on equal monthly production.) October November December January February March 150 Sales Forecast Sales (units) Sales (unit price: $3,000).. Cash Receipts Schedule 75 25 0 0 300 $ 450,000 $ 225,000 $ 75,000 0 0 $ 900,000 50% cash $ 225,000 $ 112,500 $ 37.500 0 0 $ 450.000 50% from prior month's sales Total cash receipts 400 375.000 225,000 112,500 37,500 0 0 $ 600.000 $ 337,500 $ 150,000 $ 37.500 0 $ 450.000 Cash Payments Schedule Production in units .. 400 400 400 400 400 Production costs (each: $2.000) $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 800,000 Overhead. 200,000 200,000 200,000 200,000 200,000 200,000 Dividends and interest 0 0 0 0 0 0 Taxes.... 150,000 0 0 $ 150,000 0 0 Total cash payments $1,150,000 $1,000,000 $1,000,000 $1,150,000 $1,000,000 $1,000,000 Cash Budget (required minimum balance: $125,000) Cash flow $-550,000 662,000 -850,000 -1,112,500 -1,000,000 -550,000 Beginning cash. 125.000 125,000 125,000 125,000 125,000 125.000 Cumulative cash balance -425,000 -537,500 -725,000 -987,500 -875,000 -425,000 Monthly loan or (repayment) 550,000 662,500 850,000 1,112,500 1,000,000 550,000 Cumulative loan... 550,000 1,212,500 2,062,500 3,175,000 4,175,000 4,725,000 Ending cash balance. $ 125,000 $ 125,000 $ 125,000 $ 125,000 $ 125,000 $ 125,000 "Note: September sales assumed to be $750,000. Table 1, Part 1 Sales forecast, cash receipts and payments, and cash budget May June April August September 1.000 1.000 500 1,000 500 Sales Forecast 250 $1,500,000 $3,000,000 $3,000,000 $3,000,000 $1,500,000 $ 750,000 Sales (units)........ Sales (unit price: $3,000)....... Cash Receipts Schedule $ 750,000 $1,500,000 $1,500,000 $1,500,000 $ 750,000 $375,000 50% cash 450,000 750,000 1,500,000 1,500,000 1,500,000 750,000 50% from prior month's sales $1,200,000 $2,250,000 $3,000,000 $3,000,000 $2,250,000 $1,125,000 Total cash receipts Cash Payments Schedule 400 400 400 400 400 400 $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 800,000 $ 800,000 200,000 200,000 200,000 $ 200,000 Production in units .. Production costs (each: $2.000)....... Overhead.. Dividends and interest 200,000 200,000 0 0 0 0 $1,000,000 $ 300,000 0 0 $ 150,000 0 0 0 Taxes Total cash payments $1,150,000 $1,000,000 $1,000,000 $1,300,000 $2,000,000 $1,000,000 Cash Budget (required minimum balance: $125,000) 50,000 1,250,000 2,000,000 1,700,000 250,000 125,000 125,000 125,000 125,000 125,000 400,000 650,000 Cash flow Beginning cash. Cumulative cash balance 175,000 1,375,000 2,125,000 1,825,000 650,000 775,000 Monthly loan or (repayment) Cumulative loan..... Ending cash balance (50,000) (1,250,000) (2,000,000) (1,425,000) 0 0 4,675,000 3,425,000 1,425,000 0 0 0 $ 125,000 $ 125,000 $ 125,000 $ 400,000 $ 650,000 $ 775,000 "Note: September sales assumed to be $750,000. Table 1, Part 2 Sales forecast, cash receipts and payments, and cash budget First Quarter October ... 150 November 75 December 25 Second Quarter January February March 0 Third Quarter April.. May June... Fourth Quarter 500 July... 1,000 August.... 1,000 September 1,000 500 250 0 300 Table 2 Sales forecast (in units) Ending Sales 150 75 25 October .... November.. December .. January February March April. May June July. August September Beginning Production Inventory This Month 400 400 650 400 975 400 1,350 400 1,750 400 2,150 400 2,250 400 2,150 400 1.550 400 950 400 350 400 250 400 0 0 300 500 1,000 1,000 1,000 500 250 Inventory Inventory ($2,000/unit) 650 $1,300,000 975 1,950,000 1,350 2,700,000 1.750 3,500,000 2,150 4,300.000 2.250 4,500,000 2,150 4,300,000 1.550 3,100,000 950 1,900,000 350 700,000 250 500,000 400 800,000 Table 3 Production schedule and inventory (equal monthly production) Accounts Receivable* $225,000 112,500 37,500 0 0 October ..... November... December.. January February March April May June July August September Cash $125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 125,000 400,000 650,000 775,000 450,000 750,000 1,500,000 1,500,000 1,500,000 750,000 375,000 Inventory $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 Total Current Assets $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 "Equals 50 percent of monthly sales Table 4 Total current assets, first year October Cumulative loan balance November December January $ 550,000 $1,212,500 $2,062,500 $3,175,000 $4,175,000 $4,725,000 February March interest expense (12.00%)... $ 5,500 $ April 12.125 $ May Cumulative loan balance Interest expense 20,625 $ 31,750 $ 41,750 $ July August June $4,675,000 $3,425,000 $1,425,000 47,250 September $ 46.750 $ 0 34.250 $ 0 Table 5 Cumulative loan balance and interest expense (1% per month 14,250 0 0 0 0 218 Pant 3 Worki one assuming month, we match the production schedule with dye sales forecast. For example, if we "Now, here's my idea," said Tim. "Instead o cing 400 items a month, every 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." a feast or famine environment nothing to do for one month, then a deluge the next. "That kind of scheduling really fouls up things in the shop where it counts. It causes "Hold on, now," Pop responded, feeling that his territory was being threatened. II'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 nor, but at least it's worth looking into. I propose that you all work up two sets of figures, glevel 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 the other issues Pop is concerned about and then make a decision on which alternative is better for the firm." level production on inventory, cash flow, loan balances, and interest expense. Tables 1 through 5 contain the financial information describing the effects of Reproduce these tables as if Tim's suggestion were implemented; that is, change the production This Month column in Table 3 from 400 each month to 150, 75, 25 , and so on, to match Sales" in the next column. Then, recompute the remainder of Table 3, and Tables 1, 4, and 5, on the basis of the new production numbers. Beginning inventory is still 400 units. Beginning cash is still $125,000 and that remains the minimum required balance. Given that Gale Force is charged 12 percent annual interest (1 percent a month) on its cumulative loan balance each month (Table 5), how much would Tim's suggestion save in interest expense in a year? Until now we have not considered any inefficiencies that have been introduced as a result of going from level to seasonal production. Assume there is an added expense for each sales dollar of 0.5 percent (0.005). On the basis of this fact and the information computed in part b, is seasonal production justified? 8. b. C. Gale Force Corporation Income Statement For Year End September 30 20xx Original Level of production Matching Sales Production $ $ Sales COGS Gross Profit Overhead Interest Expense Earnings before taxes Taxes 30% Earnings after taxes 14,400,000 9,600,000 4,800,000 2,400,000 254,250 2,145,750 643,725 1,502,025 14,400,000 9,600,000 4,800,000 2,400,000 186,500 2,213,500 664,050 1,549,450 25% reduction in production and 10% Increase in cost $ 14,400,000 10,406,000 3,994,000 2,400,000 46,100 1,547,900 464,370 $ 1,083,530 $ $