1) Tobin Supplies Company expects sales next year to be $410,000. Inventory and

Question

1) Tobin Supplies Company expects sales next year to be $410,000. Inventory and accounts receivable will increase $70,000 to accommodate this sales level. The company has a steady profit margin of 15 percent with a 35 percent dividend payout.

How much external financing will Tobin Supplies Company have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

2) Antonio Banderos & Scarves makes headwear that is very popular in the fall-winter season. Units sold are anticipated as:

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup.

However, Antonio decides to go with level production to avoid being out of merchandise. He will produce the 14,500 items over four months at a level of 3,625 per month.

a. What is the ending inventory at the end of each month? Compare the unit sales to the units produced and keep a running total.

b. If the inventory costs $8 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 1 percent as the monthly rate.)

Explanation / Answer

Question 1:

Expected sales next year = 410,000

Profit margin = 15%

Net Profit = 0.15*410,000 = $61,500

Dividend = 35% of net profit = 0.35*61,500 = 21,525

Retained earnings = 61,500 -21,525 = 39,975

Increase in Accounts recievable (Assets) = 70,000

Addtional funds needed = Increase in accounts receivable - Increase in accumulated retained earnings

Addtional funds needed = 70,000-39,975 = 30,025

External funds needed = $30,025

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