Question

Holcomb and Cromworthy are forecasting a 10% increase in sales next year. Assume the company is operating at 90% capacity. The company has 100,000 shares of common stock outstanding and dividends are $0.22 per share.

ASSETS 2015 $52,000 402,000 836,000 $1,290,000 527,000 -166,200 $360,800 $1,650,800 2014 $57,600 351,200 715,200 $1,124,000 491,000 -146,200 $344,800 $1,468,800 CASH ACCOUNTS RECEIVABLE INVENTORIES TOTAL CURRENT ASSETS GROSS FIXED ASSETS LESS: ACCUMULATED DEPRECIATION NET FIXED ASSETS TOTAL ASSETS LIABILITIES AND EQUITY ACCOUNTS PAYABLE NOTES PAYABLE ACCRUALS TOTAL CURRENT LIABILITIES LONG-TERM DEBT COMMON STOCK RETAINED EARNINGS TOTAL EQUITY TOTAL LIABILITIES AND EQUITY $175,200 225,000 140,000 $540,200 424,612 460,000 225,988 $685,988 $1,650,800 $145,600 200,000 136,000 $481,600 323,432 460,000 203,768 $663,768 $1,468,800 INCOME STATEMENTS SALES COST OF GOODS SOLD GROSS PROFIT OTHER EXPENSES DEPRECIATION 2015 $3,850,000 -3,250,000 600,000 -430,300 -20,000 $149,700 -76,000 $73,700 -29,480 $44,220 $0.44 2014 $3,432,000 -2,864,000 568,000 -340,000 -18,900 $209,100 -62,500 $146,600 -58,640 $87,960 $0.88 EBIT INTEREST EXPENSE EBT TAXES (40%) NET INCOME EPS

1) At 90% capacity, what level will sales have to reach for the discretionary items to become spontaneous that is move-in direct proportion to sales?

*4,277,777

*4,235,000

*3,975,000

2) Compute the new level of net income for the company

*85,880

*80,220

*56,935

3) Compute the company's additional retained earnings for the year

*55,360

*61,420

*58,220

4) Compute the new level of total assets required

*1,779,800

*1,815,800

*1,272,680

5) Calculate the new level of current liabilities                             

*$502,358

*$568,357

*$571,720

6) Compute the company's new level of retained earnings on the balance sheet                           

$224,600

$277,666

$284,208

Answer 1

1) At 90% capacity, what level will sales have to reach for the discretionary items to become spontaneous that is move-in direct proportion to sales?
Sales at 90% Capacity	38,50,000
Forecasting 10% increase in sales at same capacity
So Level of sales will be 10% more than existing sales (3850000*110%)	42,35,000
Current Capacity 90% plus 10% i.e new level of capacity is 99%
2) Compute the new level of net income for the company
	New level (Forecast)
Sales (as above)	42,35,000
Cost of goods Sold
(3250000/3850000*4235000)	-35,75,000
Gross Profit	6,60,000
Other expenses	-4,30,300
Depreciation	-20,000
EBIT	2,09,700
Interest expense	-76,000
EBT	1,33,700
Taxes (40%)	-53,480
Net Income	80,220
EPS	0.80
Net income	80,220
3) Compute the company's additional retained earnings for the year
Net income	80,220
Dividend (100000 shares * 0.22)	-22,000
Additional retained earnings	58,220
4) Compute the new level of total assets required
	2015	New level
Assets	$
Cash	52,000	37,940	Refer note 1 below
Accounts Receivable	4,02,000	4,42,200	10% Increase ( it increases with increase in capacity)
Inventory	8,36,000	9,19,600	10% Increase ( it increases with increase in capacity)
Total current Assets	12,90,000	13,99,740
Gross Fixed Assets	527000	5,27,000	Same Level
Less Accum Depreciation	-1,66,200	-1,86,200	Reduce depreciation for the year
Net Fixed Assets	3,60,800	3,40,800
Total Assets	16,50,800	17,40,540
5) Calculate the new level of current liabilities
Liabilities and Equity
Accounts Payable	1,75,200	1,92,720	10% Increase ( it increases with increase in capacity)
Notes Payable	2,25,000	2,25,000	Same level
Accruals (Other than tax)	1,40,000	1,54,000	10% Increase ( it increases with increase in capacity)
Total Current Liabilities	5,40,200	5,71,720
Long-Term Debt	4,24,612	4,24,612	Same
Common Stock	460000	4,60,000	Same
Retained Earnings	2,25,988	2,84,208	Add Additional retained earnings
Total Equity	6,85,988	7,44,208
Total Liabilities and Equity	16,50,800	17,40,540
5) New level of cuurent liabilities is 5,71,720
Note1 Calculation of Cash balance
Net profit after dividend	58,220
Add
Depreciation	20,000
Purchase of additional Fixed Assets	-
(10% of current FA)
Change in working capital
Change in current assets
Inventory (919600-836000)	-83,600
Accounts receivable (442200-402000)	-40,200
Change in current Liabilities
Accounts Payable (192720-175200)	17,520
Accruals (154000-140000)	14,000
Total increase/(Decrease) in Cash	-14,060
(Assuming interest are paid in cash in the current year and last year taxes are paid this year)
Opening Cash	52,000
Closing Cash balance	37,940
6) New level of retained earnings	2,84,208
(Add additional retained earnings to present level)