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Ice Nine - Mini-Case

a) Credit sales; Credit terms; Estimated bad debts percentage


b) 1% * (7,000,000 * 92%) = 64,400.00
c) 2% * (8,000,000 * 92%) = 147,200.00
d)
OLD NEW Change
Sales 7,000,000.00 8,000,000.00 1,000,000.00
Less: Sales Discount 35,000.00 80,000.00 45,000.00
Cost of Production 5,250,000.00 6,000,000.00 750,000.00
Profit before BD/Tax 1,715,000.00 1,920,000.00 205,000.00
Less: Bad debts 560,000.00 640,000.00 80,000.00
Profit before Tax 1,155,000.00 1,280,000.00 125,000.00
Less: Tax (15%) 173,250.00 192,000.00 18,750.00
PROFIT 981,750.00 1,088,000.00 106,250.00

Incremental Profit Increased of 106,250

e) Additional Investment in Accounts Receivable:


Incremental cost in Sales Discount 45,000.00
Incremental Cost in Bad debts 80,000.00
TOTAL 125,000.00
Additional Investment in Inventory: 100,000.00
Total Additional Investment 225,000.00

f) 80,000 - 35,000 = 45,000.00


g) See computation in (d)

Incremental Revenue 1,000,000.00


Incremental Cost 893,750.00
Incremental Profit 106,250.00

Yes, the proposed change should be enacted since in it would result in


a favorable profit.
BUTLER
1. The company operations were limited to the retail distribution of lumber products in the local area. These include Plywood, moldings, and sash
and door products. Butler Lumber Company is well in general financially. By looking at the sales and asset growth, the company is able to gain more
in terms of sales especially since the company is run with few employees. With additional employees, it is able to improve its sales growth. Taking
into account of its the profitability, Butler Lumber Company has increasing ROE along with increasing ROIC. Its credit terms also enable the business
to increase it days in payables and its management of its inventory as a proportion of sales indicates a better management of inventory over years.
On the flip side of the coin, there might some ratios that might indicate otherwise such as ROA and profit margin. However, given its strategy, the
profit margin decrease is largely justified. In terms of liquidity, both Butler’s current and quick ratios along with time interest earned have been the
decreasing over the years. However, the numbers still indicates good ability to pay off debt in case of liquidation and still remains healthy. Similarly, in
terms of gearing and leverage, its numbers had been increasing however, given that Butler Lumber is in a growing business, it largely reasonable for
Butler Lumber to increase its debt as a proportion of its assets. In a nutshell, based on the financial ratios alone, Butler Lumber’s remains financially
sound

2.      The company has been using cash reserves and constant borrowing of money to cover its  liabilities. The reason Mr. Butler is continuing to 
have to borrow so much money is that when he  bought out Mr. Starks’s interest in the company he became in debt which caused him to have to  take 
out a loan to repay the amount he owed to Mr. Stark and therefore increased his amount of  debt. Mr. Butler has not been managing his company’s 
cash flow wisely. He is consistently  having to having to use cash reserves to pay back liabilities and he is offering too much credit to  his customers 
which is increasing his accounts receivable.

3. Proforma Income Statement (2011) (in thousands)

Net Sales 3,600.00


Cost of Goods Sold
Beginning Inventory 418.00
Purchases 2,720.00
3,138.00
Less: Ending Inventory 549.00
Total Cost of Goods Sold 2,589.00
Gross Profit 1,011.00
Operating Expense 901.00
Operating Profit 110.00
Add: Purchase Discounts 54.00
Less: Interest Expense 49.00
Net Income before Taxes 115
Provision for income taxes (34%) 39
Net Income 76

Proforma Balance Sheet (2011) (in thousands)

Cash 54.00
Accounts Receivable, net 394.00
Inventory 549.00
Total Current Assets 997.00
Propert, net 242.00
TOTAL ASSETS 1,239.00

Notes Payable, bank 425.00


Notes Payable, Mr Stark
Notes payable, trade
Acocunts Payable 316.00
Accrued Expenses 52.00
Long-term debt, current portion 7.00
Current liabilities 800.00
Long-term debt 43.00
Total liabilities 843.00
Net Worth 396.00
TOTAL LIABILITIES & NET WORTH 1,239.00
4. Proforma Income Statements for 2011-2013 with an averade increase in annual sales of 25% (in thousands)
2010 % of Sales 2011 2012 2013
Net Sales 2,694.00 25% 3,368 4,209 5,262
Cost of Goods Sold
Beginning Inventory 326.00 418 523 653
Purchases 2,042.00 2,542 3,178 3,972
2,368.00
Less: Ending Inventory 418.00 0.155 523 653 816
Total Cost of Goods Sold 1,950.00 0.724 2,438 3,047 3,809
Gross Profit 744.00 930 1,163 1,453
Operating Expense 658.00 0.244 823 1,028 1,285
Operating Profit 86.00 108 134 168
Less: Interest Expense 33.00 49 49 49
Net Income before Taxes 53 59 85 119
Provision for income taxes (34%) 9 34% 20 29 40
Net Income 44 39 56 79

4. Proforma Income Statements for 2011-2013 with an averade increase in annual sales of 25%
% of sales 2011 2012 2013
Cash 41.00 0.015 51 64 80
Accounts Receivable, net 317.00 0.118 396 495 619
Inventory 418.00 0.155 523 653 816
Total Current Assets 776.00 970 1,213 1,516
Propert, net 157.00 0.058 196 245 307
TOTAL ASSETS 933.00 1,166 1,458 1,822

Notes Payable, bank 233.00 382 541 382


Notes Payable, Mr Stark - - - -
Notes payable, trade - - - -
Acocunts Payable 256.00 0.095 320 400 500
Accrued Expenses 39.00 0.014 49 61 76
Long-term debt, current portion 7.00 7 7 7
Current liabilities 535.00 758 1,009 965
Long-term debt 50.00 43 36 29
Total liabilities 585.00 801 1,045 994
Net Worth 348.00 1.140 366 413 828
TOTAL LIABILITIES & NET WORTH 933.00 1,166 1,458 1,822

5) Yes, since it projected an increase on Net Income.