Bombs away video games corporation

Bombs Away Video Games Corporation has forecasted the following monthly sales:

January

$

98,000

July

$

43,000

February

91,000

August

43,000

March

23,000

September

53,000

April

23,000

October

83,000

May

18,000

November

103,000

June

33,000

December

121,000

Total annual sales = $732,000

Bombs Away Video Games Corporation

Production and inventory schedule in units

Beginning inventory

+

Production

–

Sales

=

Ending inventory

January

23,000

February

March

April

May

June

July

August

September

October

November

December

Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for $5 per unit and costs $2 per unit to produce. A level production policy is followed. Each month's production is equal to annual sales (in units) divided by 12.

Of each month's sales, 40 percent are for cash and 60 percent are on account. All accounts receivable are collected in the month after the sale is made.

a.

Construct a monthly production and inventory schedule in units. Beginning inventory in January is 23,000 units.

b.

Prepare a monthly schedule of cash receipts. Sales in December before the planning year are $100,000.

Bombs Away Video Games Corporation

Cash Receipts Schedule

January

February

March

April

May

June

Sales

$

$

$

$

$

$

Cash receipts:

Cash sales

$

$

$

$

$

$

Prior month's credit sales

Total cash receipts

$

$

$

$

$

$

Bombs Away Video Games Corporation

Cash Receipts Schedule

July

August

September

October

November

December

Sales

$

$

$

$

$

$

Cash receipts:

Cash sales

$

$

$

$

$

$

Prior month's credit sales

Total cash receipts

$

$

$

$

$

$

Prepare a cash payments schedule for January through December. The production costs of $2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $43,000 per month.

Bombs Away Video Games Corporation

Cash Payments Schedule

Constant production

January

February

March

April

May

June

Production cost

$

$

$

$

$

$

Other cash payments

Total cash payments

$

$

$

$

$

$

Bombs Away Video Games Corporation

Cash Payments Schedule

Constant production

July

August

September

October

November

December

Production cost

$

$

$

$

$

$

Other cash payments

Total cash payments

$

$

$

$

$

$

2.

Guardian Inc. is trying to develop an asset-financing plan. The firm has $400,000 in temporary current assets and $300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 25 percent. (Do not round intermediate calculations. Round your answers to the nearest whole number.)

Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 60 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 13 percent on long-term funds and 8 percent on short-term financing. Compute the annual interest payments under each plan.

Annual Interest

Conservative

$

Aggressive

$

Given that Guardian’s earnings before interest and taxes are $280,000, calculate earnings after taxes for each of your alternatives.

Earnings After Taxes

Conservative

$

Aggressive

$

What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed?

Conservative

Aggressive

Total interest

$

$

Earnings after taxes

$

$

3.

Biochemical Corp. requires $740,000 in financing over the next three years. The firm can borrow the funds for three years at 12.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 9.25 percent interest in the first year, 13.50 percent interest in the second year, and 10.50 percent interest in the third year. Assume interest is paid in full at the end of each year.

Determine the total interest cost under each plan.

Interest Cost

Long-term fixed-rate

$

Short-term variable-rate

$

Which plan is less costly?

Long-term fixed-rate plan

Short-term variable-rate plan

4.

Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:

January

$

8,100

April

$

8,100

February

2,100

May

9,100

March

3,100

June

4,100

Short-term financing will be utilized for the next six months. Projected annual interest rates are:

January

5

%

April

12

%

February

6

May

12

March

9

June

12

What long-term interest rate would represent a break-even point between using short-term financing and long-term financing? (Round the monthly interest rate to 2 decimal places when expressed as a percent (e.g., .67%) and use this rounded rate to compute the monthly interest. Round the monthly interest to the nearest whole cent. Use the rounded monthly interest amounts to compute the total interest for the 6-month period. Input your answer as a percent rounded to 2 decimal places.)

Interest rate

%

5.

Assume that Hogan Surgical Instruments Co. has $2,700,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan, the return will be 11 percent. If the firm goes with a short-term financing plan, the financing costs on the $2,700,000 will be 7 percent, and with a long-term financing plan, the financing costs on the $2,700,000 will be 9 percent.

Compute the anticipated return after financing costs with the most aggressive asset-financing mix.

Anticipated return

$

Compute the anticipated return after financing costs with the most conservative asset-financing mix.

Anticipated return

$

Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix

Anticipated Return

Low liquidity

$

High liquidity

$