The Haverly Company expects to finish the current year with the following financial results and is developing its annual plan for next year.

Haverly Company Income Statement This Year ($000)

	$	%
Revenue	$ 73,820	100.0
COGS	31,743	43.0
Gross margin	$ 42,077	57.0
Expenses
Marketing	$ 17,422	23.6
Engineering	7,087	9.6
Finance & administrative	7,603	10.3
Total expenses	$ 32,112	43.5
EBIT	$ 9,965	13.5
Interest	2,805	3.8
EBT	$ 7,160	9.7
Income tax	3,007	4.1
Net income	$ 4,153	5.6

Haverly Company Balance Sheet This Year ($000)

ASSETS	LIABILITIES & EQUITY
Cash $ 9,940 Accounts receivable 12,303 Inventory 7,054 Current assets $ 28,297 Fixed assets Gross $ 65,223 Accumulated depreciation (23,987) Net $ 41,236	Accounts payable $ 1,984 Accruals 860 Current liabilities $ 2,844 Long-term debt $ 22,630 Equity Stock accounts $18,500 Retained earnings 25,559 Total equity $ 44,059
Total assets $ 69,533	Total L&E $ 69,533

Payables are almost entirely due to inventory purchases and can be estimated through COGS, which is approximately 45% purchased material.

Currently owned assets will depreciate an additional $1,840,000 next year.

There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $32 million is expected to grow by 12% next year. The closing date of the year will be six working days after a payday. The second accrual is an estimate of the cost of purchased items that have arrived in inventory, but for which vendor invoices have not yet been received. This materials accrual is generally about 10% of the payables balance at year end.

The combined state and federal income tax rate is 42%.

Interest on current and future borrowing will be at a rate of 12%. The plan will be based on the following assumptions.

PLANNING ASSUMPTIONS

Income Statement Items

(1) Revenue will grow by 13% with no change in the product mix. Competitive pressure, however, is expected to force some reductions in pricing.

(2) The pressure on prices will result in a 1.5% deterioration (increase) in the next years cost ratio.

(3) Spending in the marketing department is considered excessive and will be held to 21% of revenue next year.

(4) Because of a major development project, expenses in the engineering department will increase

by 20%.

(5) Finance and administration expenses will increase by 6%.

Assets and Liabilities

(6) An enhanced cash management system will reduce cash balances by 10%.

(7) The ACP will be reduced by 15 days. (Calculate the current value to arrive at the target.)

(8) The inventory turnover ratio (COGS/inventory) will decrease by .53.

(9) Capital spending is expected to be $7 million. The average depreciation life of the assets to be ac- quired is five years. The firm uses straight-line depreciation and takes a half year in the first year.

(10) Bills are currently paid in 50 days. Plans are to shorten that to 40 days.

(11) A dividend totaling $1.5 million will be paid next year. No new stock will be sold. Develop next years financial plan for Haverly on the basis of these assumptions and last years financial statements. Include a projected income statement, balance sheet, and statement of cash flows.