In early July 2015 David Kortenkamp, PhD, President and CEO of TRACLabs, Inc., was reviewing the firms working capital position. It was his custom to calculate working capital needs for the next six months in January and July of each year and to formulate plans for meeting the Companys needs.

TRACLabs, which was founded in 1986, manufactured industrial robots that were used in the manufacture of various other products. Many of the industrial robots were used in the automotive industry. The company had an uneven history of financial performance. Some years were very good, and the company suffered during some years. The companys founder, William Tibbets, brought in new management in 2007. He then retired, but still kept a significant number of voting shares of the company and he continued to be the companys largest shareholder. However, the company floundered during this time with operating losses and poor financial management.

In the spring of 2009 (with the economy in recession) this situation came to the attention of Mr. Adams, a businessman, who specialized in rehabilitating financially weak concerns. He analyzed the company and found that it employed a number of skilled workers and possessed good equipment suitable for precision work. He was also impressed by prospects for the companys industrial robotic welder, which was a far superior welder to competitive products. As a result of his analysis, he concluded that with competent management, the company could be operated profitability. Adams approached the stockholder group, led by Tibbets, and an agreement was worked out whereby David Kortenkamp became President and CEO. Kortenkamp was to receive a fixed salary. Beginning in July of 2015 the Board of Directors added a bonus to Kortenkamps salary, equal to 6.5% of accrual based net income. The contract states that the bonus will be earned and paid in the first month of any quarter, based on the results for the previous quarter (beginning based on performance in the 3rd quarter of 2015). For example, the bonus is considered to be contractually earned (and paid) in the fourth quarter, based on the third quarter earnings.

During the last few years, Kortenkamp concentrated on obtaining various fixed priced NASA contracts for the manufacture of precision equipment. Because of rigid economies he instituted, these contracts proved highly profitable. These profits and Kortenkamps skillful financial management soon turned the company around. Dividend payments were suspended until the company had returned to a string of at least three years of profitable operations. By the end of the 2011, the deficit that had accumulated during the years of unprofitable operations had been eliminated.

When the NASA contracts were completed and no following work with NASA could be obtained, Kortenkamp took steps to curtail overhead expenses - but he retained the companys skilled workers. Kortenkamp concentrated on promoting the companys industrial robotic welder, for which the demand had improved. Monthly orders and shipments during the first half of 2015 averaged about 75 units priced at $1,900 each, and a steady demand seemed to be in place for approximately 90 120 industrial welders per month. More units could have been sold and shipped, reducing the companys backlog, but Kortenkamp did not wish to risk overextending the company while conditions were so unsettled. The company can comfortably produce and ship approximately five industrial welding robots a day, working five days a week.

The following paragraph summarizes additional information about the companys core business:

To ensure against delays in deliveries, Kortenkamp carefully scheduled inventory purchases. Exhibit 1 below shows the schedule of purchases that should be used when developing the forecast for the upcoming six months. The companys purchases were made on terms of the amount due within 30 days (net/30) after the purchased items were received and invoices were paid promptly when due.

Wages were paid on the 15th of the month and the last day of each month. Hence, they were paid in the same month they were earned.

Estimated per unit direct costs of production for the industrial robotic welder were:

- Material - $384

- Labor - $346

The length of the production process was approximately four weeks. Units were shipped as soon as produced and terms of the sale were net/30. Also, during 2015 the company has required its customers to incur the shipping costs.

Due to demand for the industrial welding robot, during 2015 the company restructured its selling arrangements to eliminate selling costs for commissions to outside contractors. It now pays its internal sales staff on a base salary and commissions basis which is included in administrative expenses as these individuals also have other administrative responsibilities.

The company had a backlog of orders for 270 industrial robotic welders at June 30, 2015. Production and shipments, however, were expected to continue at the rate of about 75 units a month through December of 2015. Regular customers were beginning to complain about the long lead time between ordering goods and delivery of goods.

Monthly indirect expenses were currently running as follows and are paid as incurred: Depreciation - $5,180, Other Factory Overhead - $33,600 and Administration - $22,560.

Income taxes payable at June 30 are due in July. Income Taxes payable at September 30 are due in October and Income Taxes payable at December 31 are due in January.

Kortenkamp expected to spend an additional $48,000 for the replacement of old machinery, used in TRACLabs core business, which appeared to be nearing the end of its useful life and was fully depreciated over a year ago. There was no way of knowing, however, when this machinery would finally break down. Kortenkamp scheduled the replacement of the equipment for July as it might take several months to get delivery if he waited for the equipment to break down. The new machine will be fully depreciated on a straight line basis over 4 years with no salvage value. The old machine replaced in July had an original cost of $32,000 and it was fully depreciated. When the new machine is placed in operation the old machine will be scrapped and any salvage value is expected to be insignificant.

Early in May of 2015, the company received an invitation to bid on a NASA contract for the manufacture of 301 specialized, high precision spot welding robots for a specific NASA project. Kortenkamp thought that a good profit could be made on the specialized robots, so he decided to submit a bid. The first bid of $6,900 per unit was rejected, but a second bid of $5,900 was accepted. Production and delivery was scheduled to occur during the second half of 2015. One prototype spot welder was to be produced during August for the purpose of testing production methods. The contract calls for the prototype to be retained at the plant, but invoiced to NASA on September 1st at $5,900. This unit was to be manufactured from materials on hand. Direct labor for this unit was estimated at $4,200. The lessons learned making the first unit were expected to enable TRACLabs to start NASA robot production at full scale about September 1st. Production was expected to be maintained at a consistent rate until November 30th. The production process from raw material to finished product was estimated to take a month. Delivery of the NASA welding robots was to start the first week in October and was to be made at the rate of 100 units a month during October, November and December. Items are shipped to NASA FOB shipping point. NASA would accept shipments at the rate of 100 units per month and payment would was expected to be received about 60 days after shipment.

Additional information about the cost of the NASA contract is as follows:

Estimated per unit direct costs of producing the NASA welding robots are as follows: labor - $1,923, material - $1,229.

Kortenkamp estimated that the buildup of the additional labor forced needed for the NASA welding robot production would require some $24,000 in extra wage expenses during August and some $28,800 of additional wage expense during December that he considered additional factory overhead. Further, tooling for the NASA contract would start in July 2015. During July and August tooling expenses are expected to increase factory overhead by about $11,520 a month.

Starting in September when full-scale production of the NASA robots was to begin, factory overhead is expected to become about $45,200 a month until the end of November 2015.

Administration expenses are expected to increase to about $33,000 a month from September 1st to the end of December 2015.

The NASA contract had made necessary the purchase of $19,200 of special tools. Delivery of these tools was expected in August 2015, and it will be paid for C.O.D. Upon completion of the contract the tools would be scrapped.

For forecasting purposes you may assume that all accounts receivable as of June 30, 2015 are collected in July, and all accounts payable as of June 30, 2015 are paid in July.

TRACLabs maintained a small deposit account with a local bank, and kept the remainder of its cash in an account with Portland Commercial Bank. TRACLabs existing line of credit has a loan limit of $900,000, which could possibly be extended to larger amounts for short periods of time if there was sufficient notice and evidence of the source of repayment. TRACLabs had to supply the bank with both historical financial statements and projected financial statements twice a year. The current balance on the line of credit is zero. Kortenkamp used the line of credit for business needs, and always repaid and rested the loan as soon as possible. The company can borrow at the prime rate plus two percent. Interest is calculated, accrued and paid based on the balance outstanding at the end of the previous month. For example, interest expense for November 2015 would be based on the outstanding balance at October 31, 2015. (Note: Use the prime rate on December 31, 2015 for purposes of developing projections.)

Kortenkamp considered the current cash balance of almost $266,500 to be in excess of operating needs. He was willing to reduce cash to a minimum balance of $100,000. If there were sufficient cash balances (in excess of $150,000) the Board would consider declaring and paying a dividend in the first quarter 2016 in the amount of 10% of net income for 2015.

It was Kortenkamps policy not to plan more than six months in advance, since he believe it was impossible to predict with any accuracy what was going to happen for a longer period. The companys plans for the first half of 2016 would be made in the light of conditions as they developed and the companys prospective financial condition at the end of 2015.

Kortenkamp is preparing for a presentation to the stockholder group about the NASA contract. However, an influential director wants Kortenkamp to consider reducing the backlog of industrial welders by considering increasing the production by 50 units per month beginning in August rather than accept the NASA contract, with sales to begin at a rate of 125 units per month in August of 2015 until the backlog was eliminated. If the company increases its production of industrial welders by 50 units per month, factory overheads will increase by $10,000 per month and administrative overheads will increase by $6,000 per month beginning in August 2015.

Exhibit 1: Tentative Schedule of Purchases

Raw Materials (industrial welder @ 75 per month) Raw Materials (industrial welder @ 125 per month)

Raw Material (NASA welder) Special Tools (NASA welder)

July August September October November 0 19,142 28,800 28,800 28,800

19,142 48,000 48,000 48,000 48,000 0 122,900 122,900 122,900 0 0 19,200 0 0 0

December 28,800

48,000 0 0

You may assume an income tax rate of 35 percent when developing projected financial statements.

A separate spreadsheet can be found online with the following information (Case 4 - Forecasting (Data)).

Balance sheets as of December 31, 2013, December 31 2014 and June 30, 2015. Income statements for the years ended December 31, 2013 and 2014 and for the six months ended June 30, 2015. A draft outline for developing a cash flow projection.

Required

Develop the following financial projections assuming (1) accepting the NASA Contract and producing 75 standard industrial welding robots a month; or (2) rejecting the NASA Contract but increasing production on the industrial welding robots by 50 units per month (to a total of 125 units per month) to decrease the backlog:

ProjectednetincomeforthesixmonthsendedDecember31,2015andtheyearended December 31, 2015.

ProjectedcashflowsforthesixmonthsendedDecember31,2015,thecashbalanceat December 31, 2015 and the total amount of outstanding borrowing at December 31, 2015.

Projected balance sheet at December 31, 2015.