Below are certain Financial Ratios provided for your reference when answering questions below. Current ratio = Total Current Assets/Total Current Liabilities, Receivable collection period (or DSO) = Accounts Receivable/(Sales/365), Days inventory on hand period = Inventory/(Cost of Sales/365), Gross margin rate = Gross Margin/Sales Operating margin rate = Operating Income/Sales Return on Sales (or Net Profit Margin) = Net Income/Sales Return on Equity = Net Income/Shareholders’ Equity

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Case A(10 points)

You are planning to open a coffee shop on January 1, 2022. You have identified the following estimated expenses for 2022:

  • Rent $60,000 per year
  • Coffee beans $0.60 per cup of coffee
  • Milk, sugar and other ingredients $0.40 per cup of coffee
  • Wages
    • Manager $70,000 per year
    • All other staff $108,000 per year
  • Utilities $12,000 per year
  • Depreciation on equipment and furnishing of the store $16,000 per year

In addition to the above, you will engage an advertising agency who will handle all marketing and advertising for the store.  The agency has given you a proposal containing 2 options which are outlined below:

  1. Fixed annual fee of $74,000
  2. Fixed annual fee of $20,000 plus 10% of revenue

Other information:

  • You expect to sell 120,000 cups of coffee during 2022 at an average selling price of $4.50 per cup

Requirements:

  1. Prepare an income statement for 2022 based on the information above for each alternative (a. engage the advertising agency paying an annual fee of $74,000, and b. engage the advertising agency paying an annual fee of $20,000 plus 10% of revenue). (6 points)
  2. Calculate the number of cups of coffee needed to breakeven during 2022 under each alternative. (2 points)
  3. Which alternative would you recommend? Explain why. (2 points)

Case B(10 points)

You are the Vice President for Sales for Palm Inc. (“Palm”)which manufactures and sells motorcycles.  Palm sells its motorcycles to dealers who in turn sell them directly to the end customer.

You are negotiating a sales contract to sell motorcycles to a dealer for each of the next 3 months with the motorcycles to be delivered to the dealer on January 15th, February 15th and March 15th.  The units sold during January are expected to be 250 and are expected to increase by 10% from the prior month’s volume for those delivered on February 15thand March 15th.  You have proposed that the following terms of sale:

  • Price per motorcycle: $12,500
  • Payment terms: payment is due upon delivery of the motorcycles

This would represent the only sales for Palm during January, February and March.  The cost to produce each motorcycle is $7,000 which is considered a variable cost.  Palm estimates its fixed operating costs will include salaries & wages of $900,000per month and monthly depreciation of $125,000.  The budgeted income statement for January, February and March assuming the dealer purchases the motorcycles under the terms offered by Palm is below.

Palm pays its expenses in the month incurred.  A cash flow budget for January, February and March is below.

The representative of the dealer has indicated that they would be willing to pay a 20% premium (price per motorcycle of $15,000) if Palm provided them the opportunity to pay for the motorcycles60 days from the date they are delivered.

  1. Calculate the budgeted income statement and cash flow budget for January thru March assuming Palm accepts the terms offered by the dealer. (7.5 points)
  2. Would you recommend that Palm accept or reject the dealer’s offer? Explain why. (2.5 points)

Case C(10 points)

 Below are certain Financial Ratios provided for your reference when answering questions below.

  • Current ratio = Total Current Assets/Total Current Liabilities
  • Receivable collection period (or DSO) = Accounts Receivable/(Sales/365)
  • Days inventory on hand period = Inventory/(Cost of Sales/365)
  • Gross margin rate = Gross Margin/Sales
  • Operating margin rate = Operating Income/Sales
  • Return on Sales (or Net Profit Margin) = Net Income/Sales
  • Return on Equity = Net Income/Shareholders’ Equity

Case C, Part 1 – Cash Flows Statement

(Completion of this part of the assessment is optional; see instructions on cover page)

 Refer to the operating section of Microsoft Inc.’sCash Flow Statements presented below when answering the questions below.

  1. Comment on the amount in 2018 relating to Accounts Payable in the statement above noting what it tells us about the change in Accounts Payable during the year (e.g., did they increase or decrease) and how this change impacted cash flow (positive or negative impact) during 2018. (1 point)
  2. Comment on the amount in 2018 relating to Accounts receivable in the statement above noting what it tells us about the change in Accounts receivable during the year (e.g., did they increase or decrease) and how this change impacted cash flow (positive or negative impact) during 2018. (1 point)

Case C, Part 2–Financial Statement Analysis

(Completion of this part of the assessment is optional; see instructions on cover page)

Refer to the financial statements of The Boston Beer Company, Inc. contained in the Appendix to this assessment when answering the questions below, as appropriate.

  1. What is the Company’s revenue growth rate during the most recent year? (2 points)
  2. What is the total capital of the Company at the end of the most recent year? (2 points)
  3. Have the Company’s collections of receivables improved or deteriorated during the most recent year compared to the prior year? Calculate a financial metric to support your assertion. (2 points)
  4. What is the cumulative amount of the excess of purchase price over the net assets acquired for business acquisitions of the Company as of the end of its most recent year end? (1 point)
  5. What was the amount of cash paid by the Company during its most recent fiscal year to: (0.5 point each)
    1. Acquire long-lived tangible assets?
    2. Pay dividends?