Week 4 - Forecasting Assignment - Background Info.

Follow the instructions below to come up with a forecasted budget which will be used to answer the questions at the bottom. Once you have calculated the answers for each question click on the link that says "Week 4 - Forecasting Assignment" where you will encounter these same questions that can be answered and recorded in the gradebook.

Background information and instructions

Below represents the business conditions expected to carry the company over into 2015. The role of the financial manager in real life is to determine how these scenarios will translate into the budget/finances of an organization. That is exactly what we are doing here. Forecasting what is likely to happen in 2015. Be sure to reference the text in the case (and the data in the tables at times) to form the best logic to predict a profit and loss (aka P&L aka income statement) for 2015.

Prepare the annual budget for the Zeeco Corporation. This is recent budget history and information from its strategic and functional/departmental plans.
Financial History (Given)				Present day
ACCOUNT	2011	2012	2013	2014	% Change over 4 years
Sales	$2,193,000	$2,245,600	$2,350,000	$2,450,192	11.73%
Cosft of Goods	$1,315,800	$1,347,360	$1,410,000	$1,470,115.20	11.73%
Gross Margin (Gross Profit)	$877,200	$898,240	$940,000	$980,076.80	11.73%
SG&A	$307,020	$494,032	$470,000	$465,536.48	51.63%
Depreciation expenses	$28,000	$24,000	$15,000	$10,000	-64.29%
Operating Profit	$542,180	$380,208	$455,000	$504,540.32	-6.94%
Interest expense	$55,500	$65,500	$45,500	$78,500	41.44%
Taxes	$189,763	$133,072.80	$159,250	$176,589.11	-6.94%
Net Income	$296,917	$181,635.20	$250,250	$249,451.21	-15.99%
* Gross Margin = Sales - Cost of Sales
** Net Profit (Before Taxes) = Gross Margin - (Sum of Expenses)

The data in the first table was used to calculate the percents seen in the second table below. The information in this table represents COGS, Gross Profit, SG&A, Depreciation, Operating Profit, Interest,Taxes and Net Income as a percent of sales for their respective years. It also shows at the top how sales have changes from year to year (as a percent) and the average percent of sales of COGS, Gross Profit, SG&A, Depreciation, Operating Profit, Interest, Taxes and Net Income as a percent of sales over this time period. You will need also to refer to this table at times to answer questions that come up.

Relationships, Changes & Averages (Given)
ACCOUNT	2011	2012	2013	2014	Ave % Change	Average % of Sales
Change in Sales		2.4%	4.65%	4.26%	3.77%
Cosft of Goods	60%	60%	60%	60%		60%
Gross Margin (Gross Profit)	40%	40%	40%	40%		40%
SG&A	14%	22%	20%	19%		18.75%
Depreciation expenses	1.28%	1.07%	.64%	.41%		.85%
Operating Profit	24.72%	16.93%	19.36%	20.59%		20.4%
Interest expense	2.53%	2.92%	1.94%	3.2%		2.65%
Taxes	8.65%	5.93%	6.78%	7.21%		7.14%
Net Income	13.54%	8.09%	10.65%	10.18%		10.61%

Use the data above and this narrative to create a budget for 2015 by answering the Test Questions at the bottom.

Sales for current products have grown an average of 3.77% per year over the last 4 years and this trend is expected to continue into next year. Cost of sales (aka cost of product) for current products has traditionally been 60% of the selling price but increased material and energy costs have increased so moving forward it is expected to average 70% of the selling price in 2015. A new product line is being introduced in 2015. It is expected to add $1,500,000 in sales; product costs are only expected to be 35% of the selling price. The product line will be absorbed into operations so there is no addition to other costs due to this addition, except for volume of sales. Hence SG&A, Depreciation, Interest, and Taxes will not be impacted from operational expenses. The only impact this new product will have is through the volume of sales it brings. It will have its own gross profit figure.

Going into next year a key strategy is to reduce Selling, General, and Administrative expense. The goal is to have marketing costs be 5% of sales and salaries at 13% of sales. In 2011, 2012 and 2013 these figures were 14%, 22%, and 20% respectively and today it is 19% of sales and the finance department is relieved to know that the forecast indicates this trend will be continuing downward. Although it was noted that sales growth in 2013, 2013, and 2014 was 2.4%, 4.65%, and 4.26% respectively (showing constant growth), this year SG&A is planned to be at only 18% of sales.

Since the firm just paid off the cost of its fleet of delivery trucks and no longer has any financing costs for the computers for its workers, depreciation is expected to decrease to zero for the first time in five years. The firm plans to pay off half of its debt in 2015 to lenders, thus decreasing the interest expense on their current loans to half of what it currently is. The tax environment is hard to predict and the corporate accountant is on vacation for another month. So, for now to forecast taxes into 2015, the plan is to rely on the average % of sales relationship from 2011 through 2014 and take that % of 2015 sales.

Questions to answer below (the same questions you will encounter on your assignment when you go to turn it in)

Question 1 10 points What amount of SALES should be planned for 2015? Remember to take into account growth of current products PLUS new, planned products.

Question 2 10 points What is the cost of sales (COGS) forecast for 2015?

Question 3 10 points What is the forecast for Gross profit for 2015?

Question 4 5 points What can we expect Selling, General, and Administrative Expense to be in 2015?

Question 5 5 points What is DEPRECIATION expected to be in 2015?

Question 6 5 points What is OPERATING PROFIT expected to be in 2015?

Question 7 15 points How would you rate this company's operating efficiency from 2011 through 2015? (Hint: take operating profit as a % of sales during this time period and note the trend).

Question 8 5 points What is the firm expected to pay in INTEREST in 2015?

Question 9 5 points What is the firm expected to pay in TAXES in 2015?

Question 10 15 points What is NET INCOME expected to be in 2015?

Question 11 15 points How should we treat the "budget" that's just been prepared?