Chapter 4 Assignment - Chapter 4 Questions 4 The new...

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Chapter 4 Questions 4. The new business is harder because you have to make explicit assumptions about everything without the benefit of history on which to base those assumptions. With an existing business, anything you don't make an assumption about is implicitly assumed to remain the same as last year. That "shortcut" option doesn't exist for a new business. 9. The statement isn't true. Computers have enabled people to do the computations involved in planning faster and easier, especially when they have to be redone several times. However, computers don't help with making planning assumptions. And those remain the heart of planning. Computers' greatest contribution is that they make it possible to evaluate the consequences of a variety of assumptions quickly. That gives people a better feel for the probabilities involved in outcomes. 11. Cash: When revenue increases more money will be flowing in from cash sales and collections and out to pay for labor and materials. So cash can be expected to increase roughly proportionately with sales. Accounts Receivable: To the extent that the new business is on credit terms, receivables will increase proportionately with sales. To the extent that sales are paid in cash there is no increase in receivables. Hence we would expect about a 10% increase in receivables – one half the sales increase. Inventory and Accounts Payable: A 20% increase in sales will require a 20% increase in production, resulting in similar increases materials purchases and inventory. Gross Fixed Assets: Since the factory is operating below capacity no new facilities or equipment will be required to increase output Therefore, gross fixed assets won’t change except for minor replacements of worn out equipment. Accumulated Depreciation: Accumulated depreciation will increase by the amount of scheduled depreciation on assets already owned. As a result Net Fixed Assets can be expected to decrease somewhat. Accruals: Direct labor wages will increase proportionately with sales which will cause a less than proportionate increase in total payroll because there won’t be any increase in administrative salaries and supervision. However, wage accruals at year end also depend on the number of days since the last payday which needs to be checked before a planning figure can be developed.
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