Question

James Confectioners—Part 1 Squeezed by Rising Costs, a Confectioner about the impact of the rapidly rising cost of the base choco- Struggles to Cope late, however. Bad weather in South America and Africa, where most of the world's cocoa is grown, and a workers' strike dis- Telford James and his wife, Ivey, are the second-generation mupted the global supply of chocolate, seading proces tuerai. There appears to be no relief from high chocolate prices in the owners of James Confectioners, a family-owned manufac- near future. The International Cocoa Organization, an industry turer of premium chocolates that was started by Telford's father, Frank, in 1964 in Eau Claire, Wisconsin. In its 50 years, which chocolate is made, to decline by 7.2 percent this year.' trade association, forecasts world production of cocoa, from James Confectioners has grown from its roots in a converted Escalating milk and sugar prices are squeezing the company's hardware store into a large, modern factory with sophisti- profit margins as well. Much to James and Ivey’s dismay, James cated production and quality control equipment. In the early Confectioners's long-term contracts with its chocolate suppliers days, all of Frank's customers were local shops and stores, have run out, and the company is purchasing its raw materials but the company now supplies customers across the United under short-term, variable-price contracts. They are concerned States and a few in Canada. Telford and Ivey have built on about the impact these increases in cost will have on the com- the company's reputation as an honest, reliable supplier of pany's financial statements and on its long-term health. chocolates. The prices they charge for their chocolates are Ivey, who has the primary responsibility for managing above the industry average but are not anywhere near the James Confectioners's finances, has compiled the balance highest prices in the industry even though the company is sheet and the income statement for the fiscal year that just known for producing quality products. ended. The two financial statements appear below: Annual sales for the company have grown to $3.9 million, and its purchases of the base chocolate used as the raw ma- terials for their products have increased from 25,000 pounds "Cocoa Forecasts," International Cocoa Organization, May 27, 2009, 20 years ago to 150,000 pounds. The Jameses are concerned http://www.icco.org/about/press2.aspx?Id=Oji12056. Balance Sheet, James Confectioners December 31, 20xx Assets $ 161,254 $ 507,951 $ 568,421 $ 84,658 $ 32,251 $ 1,354,536 Current Assets Cash Accounts Receivable Inventory Supplies Prepaid Expenses Total Current Assets Fixed Assets Land Buildings, net Autos, net Equipment, net Furniture and Fixtures, net Total Fixed Assets $ 104,815 $ 203,583 $ 64,502 $ 247,928 $ 40,314 $ 661,142 Total Assets $ 2,015,678 Liabilities Current Liabilities Accounts Payable Notes Payable $ 241,881 $ 221,725 (continued) 681

3. a) How do the ratios you calculated for this year compare to those of the typical company in the industry?

b) Describe and explain the areas that could cause the company problems in the future.

Answer 1

RATIO                                            James                                                  Percent

                                                                      Confectioners          Confectionary     Variation

                                                                  Current          Last             Industry            from

                                                                    Year              Year              Mean*        Ind. Mean

Liquidity Ratios

    Current Ratio                                          2.01               1.86                 1.7                   18.0%

    Quick Ratio                                             1.16               1.07                 0.8                   45.5%

Leverage Ratios

    Debt Ratio                                              0.62               0.64                 0.7                   -11.5%

    Debt-to-Net Worth Ratio                       1.60               1.71                 1.7                   -6.0%

    Times Interest Earned Ratio                   2.38               2.49                 2.3                      3.5%

Operating Ratios

    Average Inventory Turnover Ratio         4.39               4.75                 4.9                   -10.4%

    Average Collection Period Ratio            47.6               34.6                 23.0 days        107.2%

    Average Payable Period Ratio                34.4               31.3                 33.5 days            2.8%

    Net Sales to Total Assets Ratio                          1.93               2.17                 2.1                   -7.9%

Profitability Ratios

    Net Profit on Sales Ratio                        4.24%            7.40%             7.0%                -39.4%

    Net Profit to Assets Ratio                      8.20%            9.20%             5.6%                46.4%

    Net Profit to Equity Ratio                    21.29%            29.21%            16.5%              29.0%

One of the most significant concerns is in the average collection period. James Confectioners is waiting more than three weeks longer than the industry average for payment. This is taking a serious toll on cash flow and may result in increasing the chances for uncollectible debt. This limited cash flow threatens the viability of the business.