Fixed Costs That Cat and Dogs, Inc.

¶ … fixed costs that Cat and Dogs, Inc. have include rent and executive salaries, which are paid no matter how many units the company builds. The company's total fixed costs are $113,200 per month. Variable costs are the factory labor and raw materials, which are $2.20 per unit ($1.50 labor plus $.70 raw materials). The company's gross profit margin per unit is 72.5%, calculated as $5.80 ($8.00 per unit sales price less $2.20 per unit cost to manufacture) divided by $8.00. The sales necessary to break even are $156,137.93. At $8 per unit, this works out to be 19,518 units, rounded, since it's not possible to make a partial unit. The following table describes the income and expenses expected by Cats and Dogs, Inc. If they sell 19,518 units:

Income (19,518 $8 units)

$156,144.00

Variable Expenses (19,518 $2.20 units)

$42,939.60

Fixed Expenses

$113,200.00

Profit (or Loss)

$4.40

Prepare an income statement.

Athens Corporation

Income Statement

For the Year Ended December 31, 2003

Revenue:

Gross Sales

$2,000,000.00

Less Cost of Goods Sold

$1,100,000.00

Gross Profit (Loss)

$900,000.00

Expenses:

Depreciation

$125,000.00

Interest

$43,800.00

Selling and Administrative

$200,000.00

Total Expenses

$368,800.00

Net Income (Loss) Before Taxes

$531,200.00

Less Taxes (40%)

$212,480.00

Net Income (Loss) After Taxes

$318,720.00

3. Calculate the following:

a) Sales

Profit Margin = Net Income / Sales

12% = $90,000 / X

Sales = $750,000

b) Total Assets

Return on Assets = Net Income / Total Assets

20% = $90,000 / X

Total Assets = $450,000

c) Total Asset Turnover

Total Asset Turnover = Net Sales / Total Assets

X = $750,000 / $450,000

Total Asset Turnover = 166%

d) Total Debt

Debt to Assets Ratio = Total Debt / Total Assets

55% = X / $450,000

Total Debt = $247,500

e) Stockholders Equity

Stockholders Equity = Total Assets -- Total Liabilities

X = $450,000 - $247,500

Stockholders Equity = $202,500

f) Return on Equity

Return on Equity = Net Income / Shareholders Equity

X = $90,000 / $202,500

Return on Equity = 44%

4. If we divide users of financial ratios into short-term lenders, long-term lenders, and stockholders, which ratios would each group be most interested in, and for what reasons?

Short-term lenders are interested in whether or not their loans and interest will be paid when due. Because time is of the essence for these payments, these lenders are interested in the company's profit margin and earning power. These show the company's ability to use the firm's assets to generate earnings independent of the financing mix.

Long-term lenders are interested with the long-term viability of the business. In order to help them determine this, the profitability ratios and gearing rations of the business are also of interest. These lenders are also interested in whether or not their loans and interest will be paid when due, but because these payments are due over a longer period of time, they are concerned with the long-term viability of the business. Total assets, total asset turnover and total debt all tell the long-term lender how well the company is managing earnings in relation to debt and equity used to finance it.

Shareholders are interested in their returns in relation to the amount of risk associated with their investment. Return on equity and stockholders equity tell how much the company is earning on funds contributed by stockholders after all expenses, including interest, have been met. In addition, shareholders are also interested in earnings per common share, dividends per common share, and the payout rate.

5. a) Prepare a monthly schedule for cash receipts for April through June.

April

May

June

Cash Sales

$7,500.00

$9,500.00

$11,000.00

Collections on Accounts Receivable

$59,400.00

$65,700.00

$78,300.00

Total Cash Receipts

$66,900.00

$75,200.00

$89,300.00

b) What is the balance of Receivables at the end of June?

The receivables balance at the end of June is $133,200, as shown in the table below.

April

May

June

Beginning Balance

$84,600.00

$92,700.00

$112,500.00

Sales on Credit

$67,500.00

$85,500.00

$99,000.00

Less Payments Made

$ (59,400.00)

$ (65,700.00)

$ (78,300.00)

Ending Balance

$92,700.00

$112,500.00

$133,200.00

6. Calculate the value of ending inventory for both companies and the cost of goods sold for both companies.

A Company's ending inventory, using LIFO inventory costing, is $2,050 and A Company's cost of goods sold is $4,550. Z Company's ending inventory, using FIFO inventory costing, is $2,350 and Z. Company's cost of goods sold is $4,250. The table below shows how each of these values was calculated.

Company A

Company Z

LIFO

FIFO

Units

Cost/unit

Total Value

Ending Inventory

COGS

Ending Inventory

COGS

$10

$1,000

$1,000

$1,000

$11

$2,100

$1,050

$1,050

$2,100

$12

$2,300

$2,300

$1,150

$1,150

$12

$1,200

$1,200

$1,200

$6,600

$2,050

$4,550

$2,350

$4,250

7. Following is the balance sheet for 2003 for Tall Tree Company:

Assets

Cash

$15,000

Accounts Receivable

90,000

Inventory

60,000

Current Assets

165,000

Fixed Assets

60,000

Total Assets

225,000

Liabilities

Accounts Payable

90,000

Notes Payable

30,000

Accrued Expenses

7,500

Current Liabilities

127,500

Common Stock

75,000

Retained Earnings

22,500

Total Liabilities and Equity

225,000

Sales for 2002 were $300,000. Sales for 2003 have been projected to increase by 20%. Assuming that Tall Tree is operating below capacity, calculate the amount of new funds required to finance the projected growth. Tall Tree has an 8% return on sales and 70% is paid out as dividends. ("You will need to prepare a Percent of Sales table" -- note, I wrote to you, the customer asking for direction vis-a-vis "percent of sales table" and did not hear back. We'll be glad to help with this providing we receive further direction from you. Otherwise, this is your paper and you may complete #7 the way you feel is right.

8. a) What is Money's break-even point in rings?

The total fixed costs are $50,000. Variable costs are $35. The business's gross profit margin per unit is 53.3%, calculated as $40 ($75 per unit sales price less $35 per unit cost to manufacture) divided by $75. The sales necessary to break even are $93,750. At $75 per unit, this works out to be 1,250 units. The following table describes the income and expenses expected by Money Corporation if they sell 1,250 units:

Income (1,250 @ $75)

$93,750

Variable Expenses (1,250 @ $35)

$43,750

Fixed Expenses

$50,000

Profit (or Loss)

$0

b) How much profit or loss will Money have if it sells 8,000 rings?

Money Corporation will have $270,000 in profit if they sell 8,000 rings, as shown in the table below:

Income (8,000 @ $75)

$600,000

Variable Expenses (8,000 @ $35)

$280,000

Fixed Expenses

$50,000

Profit (or Loss)

$270,000

9. Should Outdoor open the branch office?

Outdoor sports should not open the branch office. If you evaluate the probability of each outcome, there is an overall probability that Outdoor Sports will lose money on the venture in the amount of $4,500, as shown in the table below. Based on this analysis, the new branch office would be a losing proposition.

Branch Office Decision Incorporating Risk

Net Income

Odds

Normal conditions

$50,000

45%

Mini-recession

$20,000

25%

Severe recession

($10,000)

20%

Failure

($300,000)

10%

Overall Net Income

($4,500)

10. a. What is the effective rate on the bank loan?

The cost of a bank loan is calculated using the relation between proceeds, dollar interest, and maturity. The general equation is C = D / P, where'd equals the dollar cost of interest, P equals the loan proceeds and C. equals the cost or effective interest rate. In this case, the dollar cost of interest for the loan being considered by Bright Flashlight is $5,500 and the loan proceeds are $10,000, giving a simple interest rate of 1.83% over 60 days ($5,500 / $300,000 = .0183). Because this loan is maturing in only 60 days, it is necessary to annualize the interest expense using the formula