This assignment allows students to view the impact of level versus seasonal production on inventory levels, bank loan requirements, and profitability. In addition, it allows students the opportunity to demonstrate the ability to apply profitability analysis activities used in financial decision making.
1. Reference tables 1 through 5 to complete the following:
A. Reproduce these tables if Tim’s suggestion were implemented; that is, change the Production This Month column in Table 2 from 400 each month to 150, 75, 25, and so on, to match Sales in the next column.
B. Recompute the remainder of Table 2, and Tables 3, 4, and 5 based on the new production numbers. Note: Beginning inventory is still 400 units. Beginning cash is still $125,000 and that remains the minimum required balance.
C. Write a one paragraph summary of what the new computations reflect and what you would suggest as a result of your findings.
2. Reference table 5 to calculate how much Tim’s suggestion would save in interest expense in a year.
A. Use your recomputed figures in Table 5 from question 1 to summarize what the change would offer as a savings from the total interest expense. Justify your perspective on whether those findings would be a positive point for Tim’s suggestion or a positive point for Roy (“Pop”).
3. Assume that there is an added expense for each sales dollar of .5 percent (.005). Based on this fact and the information computed in question 2, is seasonal production justified?
A. Compute the total sales using table 3 ( original or recomputed table can be sued)
B. Apply the added expense and identify what the expense amount will do (increase/decrease and by how much).
C. Compare the rate of the added expense burden to the interest savings computed in question 2 of table5.
D. Write a one paragraph summary of your findings. Include if you feel the seasonal production plan is justified or not and why you are making the formal recommendation to implement the change or not.