Palm-West Products (D) 1. Background Valerie Preston formed Palm-West Products, Inc. in 2003 when she obtained an exclusive franchise to nationally distribute designer windows. Recent high sales growth of the base window (WIND-B), along with expected sales growth for a new enhanced window (WIND-E), requires adding management team members. Ms. Preston is keenly aware of other growth-oriented companies within the designer window sector that have run out of cash and gone into bankruptcy. Seeing potentially viable businesses fail particularly concems Ms. Preston and, consequently, she wants to ensure that sufficient cash will be available to accommodate PWP's expected growth. She would like to present a financial plan to PWP's board of directors and needs a financial model that can be used to address questions from top management and members of the board of directors. She would also like to provide the board with a graphical cost-volume-profit analysis. 1.1 Company information From her prior education and work experience, Ms. Preston understands that the starting point for a financial plan is a reliable sales forecast. Thus, she conferred with Tom Sellers, the sales manager, along with an outside marketing consultant. Tom has studied industry sales and economic trends, along with other important market factors within the highly competitive designer window industry to establish a unit sales forecast. As shown in Exhibit 1. total monthly unit sales volume is expected to continue increasing over the third quarter, but with sales mix shifting toward the new enhanced window(WIND-E). In addition, Ms. Preston determined through discussions with the accounts receivable manager that all sales to retailers are on account, with no discount, and payable within 15 days. However, the manager indicates that only 20% of a month's sales are typically collected by month-end. An additional 50% is collected in the month following, and the remaining 30% is collected in the second month following sale. Thus far, bad debts have been negligible due to diligent collection efforts. Since Palm-West Products does not want to forfeit market share to competitors, it maintains a policy to never stock out of its Palm-West Products (D) windows. Therefore, the company maintains desired ending inventories equal to 75% of the next month's unit sales. Prior to June, PWP sold only the basic window (WIND-B) at a price of $230 per unit. PWP purchases the WIND-B model from an overseas manufacturer for $155 per unit. The company pays for inventory purchases as follows: 50% in the month of purchase and the remaining 50% the following month. In June, PWP began carrying a premium model WIND-P, priced at $380, which costs $225 from the manufacturer. The current sales mix is 80% WIND-B and 20% WIND-P. However, the company expects this mix to shift toward the premium model, along withongoing competitive pricing pressure (see Exhibit 1). The company's monthly operating expenses (organized by cost behavior) are provided in Exhibit 2. For simplicity, the company assumes that all operating expenses are paid in cash during the month incurred, with the exception of depreciation and insurance expense. New fixed assets, including personal computers and office furniture, are expected to be purchased during September for $100,000 cash. Unit Sales Forecasted Sales Volume July August September Total 10,200 11,400 12,700 BASE 7,956 8,550 9,017 PREMIUM 2.244 2.850 3,683 225 221 Sales Price BASE PREMIUM 372 216 358 155 Unit Cost BASE PREMIUM 155 225 155 225 225 Exhibit 1. PWP's sales forecast and other sales information Palm-West Products (D) Variable: Sales commissions (% of sales dollars) Shipping & handling (per unit sold) 5% of sales $15 per unit Fixed: Wages and salaries Rent Utilities Insurance expired Depreciation Other S&A Exhibit 2. PWP's planned operating expenses per month (per month) 315,000 26,000 9,500 4,500 16,000 38,000 The company, which is privately owned with Ms. Preston as the majority shareholder, declares dividends of $20,000 at the end of each quarter, payable in the first month of the following quarter. Palm-West Products' actual balance sheet, as of June 30, is provided in Exhibit 3. Although PWP currently has no debt, the company has recently established a revolving line-of-credit through which it can borrow from The Bank of Bay Area at 8% annual interest. To simplify, assume no tax consequences. Cash Accounts Receivable Inventory Prepaid Insurance Fixed Assets, net of depreciation Total Assets June 47,000 2,493,200 1,292,850 20,000 1.480,000 5.333,050 Palm-West Products (D) Accounts Payable 889,075 Line-of-Credit Dividends Payable 20,000 Capital Stock 1,750,000 Retained Earnings 2,673,975 5,333,050 Exhibit 3. PWP's balance sheet for June 30. The accounts receivable balance of $2,493,200 at the end of June is from sales in May and June sales. Total sales revenue in May was $1,932,000, while it was $2,392,000 in June. The ending inventory consisted of 6,120 basic windows costing $155 per unit, and 1,530 premium windows at $225 per unit. The cash balance was $40,000, in addition the line-of-credit balance was $234.297 at the end of July. Notes Need to prepare a budgeted balance sheet for July Palm-West Products (D) 1. Background Valerie Preston formed Palm-West Products, Inc. in 2003 when she obtained an exclusive franchise to nationally distribute designer windows. Recent high sales growth of the base window (WIND-B), along with expected sales growth for a new enhanced window (WIND-E), requires adding management team members. Ms. Preston is keenly aware of other growth-oriented companies within the designer window sector that have run out of cash and gone into bankruptcy. Seeing potentially viable businesses fail particularly concems Ms. Preston and, consequently, she wants to ensure that sufficient cash will be available to accommodate PWP's expected growth. She would like to present a financial plan to PWP's board of directors and needs a financial model that can be used to address questions from top management and members of the board of directors. She would also like to provide the board with a graphical cost-volume-profit analysis. 1.1 Company information From her prior education and work experience, Ms. Preston understands that the starting point for a financial plan is a reliable sales forecast. Thus, she conferred with Tom Sellers, the sales manager, along with an outside marketing consultant. Tom has studied industry sales and economic trends, along with other important market factors within the highly competitive designer window industry to establish a unit sales forecast. As shown in Exhibit 1. total monthly unit sales volume is expected to continue increasing over the third quarter, but with sales mix shifting toward the new enhanced window(WIND-E). In addition, Ms. Preston determined through discussions with the accounts receivable manager that all sales to retailers are on account, with no discount, and payable within 15 days. However, the manager indicates that only 20% of a month's sales are typically collected by month-end. An additional 50% is collected in the month following, and the remaining 30% is collected in the second month following sale. Thus far, bad debts have been negligible due to diligent collection efforts. Since Palm-West Products does not want to forfeit market share to competitors, it maintains a policy to never stock out of its Palm-West Products (D) windows. Therefore, the company maintains desired ending inventories equal to 75% of the next month's unit sales. Prior to June, PWP sold only the basic window (WIND-B) at a price of $230 per unit. PWP purchases the WIND-B model from an overseas manufacturer for $155 per unit. The company pays for inventory purchases as follows: 50% in the month of purchase and the remaining 50% the following month. In June, PWP began carrying a premium model WIND-P, priced at $380, which costs $225 from the manufacturer. The current sales mix is 80% WIND-B and 20% WIND-P. However, the company expects this mix to shift toward the premium model, along withongoing competitive pricing pressure (see Exhibit 1). The company's monthly operating expenses (organized by cost behavior) are provided in Exhibit 2. For simplicity, the company assumes that all operating expenses are paid in cash during the month incurred, with the exception of depreciation and insurance expense. New fixed assets, including personal computers and office furniture, are expected to be purchased during September for $100,000 cash. Unit Sales Forecasted Sales Volume July August September Total 10,200 11,400 12,700 BASE 7,956 8,550 9,017 PREMIUM 2.244 2.850 3,683 225 221 Sales Price BASE PREMIUM 372 216 358 155 Unit Cost BASE PREMIUM 155 225 155 225 225 Exhibit 1. PWP's sales forecast and other sales information Palm-West Products (D) Variable: Sales commissions (% of sales dollars) Shipping & handling (per unit sold) 5% of sales $15 per unit Fixed: Wages and salaries Rent Utilities Insurance expired Depreciation Other S&A Exhibit 2. PWP's planned operating expenses per month (per month) 315,000 26,000 9,500 4,500 16,000 38,000 The company, which is privately owned with Ms. Preston as the majority shareholder, declares dividends of $20,000 at the end of each quarter, payable in the first month of the following quarter. Palm-West Products' actual balance sheet, as of June 30, is provided in Exhibit 3. Although PWP currently has no debt, the company has recently established a revolving line-of-credit through which it can borrow from The Bank of Bay Area at 8% annual interest. To simplify, assume no tax consequences. Cash Accounts Receivable Inventory Prepaid Insurance Fixed Assets, net of depreciation Total Assets June 47,000 2,493,200 1,292,850 20,000 1.480,000 5.333,050 Palm-West Products (D) Accounts Payable 889,075 Line-of-Credit Dividends Payable 20,000 Capital Stock 1,750,000 Retained Earnings 2,673,975 5,333,050 Exhibit 3. PWP's balance sheet for June 30. The accounts receivable balance of $2,493,200 at the end of June is from sales in May and June sales. Total sales revenue in May was $1,932,000, while it was $2,392,000 in June. The ending inventory consisted of 6,120 basic windows costing $155 per unit, and 1,530 premium windows at $225 per unit. The cash balance was $40,000, in addition the line-of-credit balance was $234.297 at the end of July. Notes Need to prepare a budgeted balance sheet for July