Gale force surfing case study

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Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Gale Force Surfing

During mid-September 2015, the top managers of the Gale Force Corporation, a leading manufacturer of windsurfing equipment and surfboards, were gathered in the president’s conference room reviewing the results of the company’s operations during the past fiscal year (which runs from October 1 to September 30).

“Not a bad year, on the whole,” remarked the president, 32-year-old Charles (“Chuck”) Jamison. “Sales were up, profits were up, and our return on equity was a respectable 15 percent. In fact,” he continued, “the only dark spot

I can find in our whole annual report is the profit margin, which is only 2.25 percent. Seems like we ought to be making more than that, don’t you think, Tim?” He looked across the table at the vice president for finance, Timothy Baggit, age 28.

“I agree,” replied Tim, “and I’m glad you brought it up, because I have a suggestion on how to improve that situation.” He leaned forward in his chair as he realized he had captured the interest of the others. “The problem is, we have too many expenses on our income statement that are eating up the profits. Now, I’ve done some checking, and the expenses all seem to be legitimate except for interest expense. Look here, we paid over $250,000 last year to the bank just to finance our short-term borrowing. If we could have kept that money instead, our profit margin ratio would have been 4.01 percent, which is higher than any other firm in the industry.”

“But, Tim, we have to borrow like that,” responded Roy (“Pop”) Thomas, age 35, the vice president for production. “After all, our sales are seasonal, with almost all occurring between March and September. Since we don’t have much money coming in from October to February, we have to borrow to keep the production line going.”

“Right,” Tim replied, “and it’s the production line that’s the problem. We produce the same number of products every month, no matter what we expect sales to be. This causes inventory to build up when sales are slow and to deplete when sales pick up. That fluctuating inventory causes all sorts of problems, including the excessive amount of borrowing we have to do to finance the inventory accumulation.” (See Tables 1 through 5 for details of Gale Force’s current operations based on equal monthly production.)

Copyright © 2017 by University of Phoenix. All rights reserved. Week 2 Case Study

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Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Table 1 Sales Forecast (in units) First Quarter Second Quarter Third Quarter Fourth Quarter

October 2014 ..... 150 January ...................... 0 April ......................... 500 July.......................... 1,000

November .......... 75 February .................... 0 May .......................... 1,000 August ..................... 500

December ........... 25 March ........................ 300 June ......................... 1,000 September ............... 250

Table 2 Production Schedule and Inventory (equal monthly production)

Beginning Inventory

Production This

Month Sales End

Inventory

Inventory ($2,000 per unit)

October 2014 .............. 400 + 400 - 150 = 650 $1,300,000 November ................... 650 400 75 975 1,950,000 December .................... 975 400 25 1,350 2,700,000 January ........................ 1,350 400 0 1,750 3,500,000 February ...................... 1,750 400 0 2,150 4,300,000 March .......................... 2,150 400 300 2,250 4,500,000 April ............................. 2,250 400 500 2,150 4,300,000 May ............................. 2,150 400 1,000 1,550 3,100,000 June ............................. 1,550 400 1,000 950 1,900,000 July .............................. 950 400 1,000 350 700,000 August ......................... 350 400 500 250 500,000 September................... 250 400 250 400 800,000

Table 3 Sales Forecast, Cash Receipts and Payments, and Cash Budget

October

2014 November December January February March

Sales Forecast

Sales (units) ................................. 150 75 25 0 0 300 Sales (unit price: $3,000) ............. $ 450,000 $ 225,000 $ 75,000 0 0 $ 900,000

Cash Receipts Schedule

50% cash ..................................... $ 225,000 $ 112,500 $ 37,500 $ 450,000 50% from prior month’s sales* ... $ 375,000 $ 225,000 $ 112,500 $ 37,500 0 0 Total cash receipts ................ $ 600,000 $ 337,500 $ 150,000 $ 37,500 0 $ 450,000