$-$ Internal Sources of Funding

Motocycle Inc. have been selling motorcycles for $20$ years. Last year they took a risk and started to sell one of Hondas scooters having previously focused on the larger Honda bikes, for the more seasoned biker. After the success of carrying just one scooter they are considering investing $$550,000$ to expand the dealership and start selling a full range of scooters. Below are last year$$s financial figures.

Prior Year $-$ Financials

Revenues

$750,000$

Total Expenses

$550,000$

Net income

$200,000$

Next year the company expects sales to increase by $30\%$ due to the expansion. The return on sales is expected to fall a little due to lower margins on the scooters to $20\%$

Management also expects there to be changes in the working capital accounts on the balance sheet.

Due to increased sales with the new dealership, Accounts receivable is expected to increase to $$30,000,$ a total increase of $$5,000$ on last year.

Again due to the expansion Lambert and sons expect to take on more inventory next year. They expect it to increase by $$20,000$ to $$95,000.$

Assets

Current assets

Cash

$40,000$

Accounts Receivable

$25,000$

Inventory

$75,000$

Total current assets

$140,000$

Long term Assets

Building

$600,000$

Equipment

$60,000$

TOTAL ASSETS

$800,000$

Liabilities and Equity

Current liabilities

Accounts Payable

$75,000$

Working Capital Loan

$25,000$

Total Current liabilities

$100,000$

Long term debts

$500,000$

TOTAL DEBTS

$600,000$

Shareholders Equity

Common Shares

$120,000$

Retained earnings

$80,000$

TOTAL SHAREHOLDERS EQUITY

$200,000$

TOTAL SHAREHOLDERS EQUITY and LIABILITIES

$800,000$

Questions

What was the company$$s return on total assets last year? $(2$ marks$)$

How much cash will internal operations provide $($i$.$e$.$ what is generated by net income, and changes in a$/$r$,$ inventory etc

How much will the company have to raise from external sources to continue with an investment of $550,000$ in capital assets

$3-$Year Average Sales per month

VR$1200$FA

CB$1000$A

CBR$500$R

CBR$250$R

CBR$125$R

PCX$150$

January

$3$

$9$

$2$

$1$

$2$

$2$

February

$4$

$4$

$2$

$2$

$6$

$1$

March

$9$

$3$

$2$

$3$

$7$

$3$

April

$27$

$18$

$15$

$9$

$17$

$25$

May

$35$

$14$

$16$

$22$

$25$

$33$

June

$36$

$27$

$18$

$27$

$16$

$34$

July

$25$

$33$

$20$

$16$

$18$

$33$

August

$16$

$15$

$18$

$12$

$9$

$18$

September

$9$

$12$

$17$

$11$

$9$

$5$

October

$18$

$9$

$4$

$5$

$5$

$4$

November

$3$

$3$

$3$

$2$

$2$

$4$

December

$2$

$2$

$3$

$2$

$1$

$1$

Motorcycle Inc prepare sales budgets on a product line Basis. To create reliable sales budgets, the dealership uses two main planning assumptions $(4$ marks$)$

Future sales can be reasonably predicted based on the three year average of the types of Honda Products that are sold at the dealership.

A prediction of changes in customer activity and economic assessments can be used to determine how sales levels will change over the coming year

Due to the economic recovery, higher fuel costs and the recent growth in vehicle sales, motorcycle shop are expecting a $10\%$ increase in vehicle sales across all models next year.

Pricing and commission rates are expected to be as follows.

VR$1200$FA

CB$1000$A

CBR$500$R

CBR$250$R

CBR$125$R

PCX$150$

Sales Price

$16995$

$13005$

$6299$

$4000$

$3299$

$3500$

Dealer$$s Commission per Vehicle

$1800$

$1200$

$800$

$550$

$350$

$375$

Salesman Commission per Vehicle

$180$

$120$

$80$

$55$

$35$

$38$

Questions:

Based on the information provided, prepare:

Monthly Product line sales budget for next year showing total sales

A monthly budget showing commission earned by the dealership for next year

A monthly budget showing the commission the dealership needs to pay to it sales people per month next year.

Expected Gross profit per month for the next year

Is there anything that could potentially be wrong with the planning assumptions used to create the sales budget. Discuss the any weaknesses with each assumption and what you would do to improve those weakness

The Expansion

The management of the company have decided to expand the store and sell more scooters based on the success of the PCX$150.$ In total the expansion will cost $$550,000.$

Financial Investment Analysis

Working Capital

A$/$R

$5,000$

Inventory

$20,000$

Capital Assets

Building

$415,000$

Furniture & Fittings

$35,000$

Equipment

$25,000$

Marketing Costs

$50,000$

Total Financial Investment Needed

$550,000$

Assignment:

Motocycle has been pre$-$approved for $$250,000$ mortgage. Your task is to develop a financial requirement plan that is one potential solution in order to raise funds to meet this need. Please do not include Internal Financing or Mortgages in your answers to a or b

a$.$ Your financial requirement plan must include a minimum of $5$ difference sources $/$ forms of finance and meet the financial need

b$.$ Each source $/$form that you choose to use must be evaluated. discussin advantages and disadvantages of each

For the conclusion, outline why your plan is the most suitable set of sources