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Unformatted text preview: 1. Gary’s Pipe and Steel company expects sales next year to be $800,000 if the economy is strong, $500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for next year? 61. Solution: Gary’s Pipe and Steel Company State of Economy Sales Probability Expected Outcome Strong $800,000 .20 $160,000 Steady 500,000 .50 250,000 Weak 350,000 .30 105,000 Expected level of sales = $515,000 1. Gary’s Pipe and Steel company expects sales next year to be $800,000 if the economy is strong, $500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for next year? 61. Solution: Gary’s Pipe and Steel Company State of Economy Sales Probability Expected Outcome Strong $800,000 .20 $160,000 Steady 500,000 .50 250,000 Weak 350,000 .30 105,000 Expected level of sales = $515,000 4. Shamrock Diamonds expects sales next year to be $3,000,000. Inventory and accounts receivable will increase $420,000 to accommodate this sales level. The company has a steady profit margin of 10 percent with a 25 percent dividend payout. How much external financing will the firm have to seek? 64. Solution: Shamrock Diamonds $3,000,000 Sales .10 Profit margin 300,000 Net income 75,000 Dividends (25%) $ 225,000 Increase in retained earnings 420,000 Increase in assets – 225,000 Increase in retained earnings $ 195,000 External funds needed 6. Fashion’s Clothiers sells scarves that are very popular in the fallwinter season. Units sold are anticipated as: October..................................................... 2,000 November................................................. 4,000 December................................................. 8,000 January..................................................... 6,000 20,000 units If seasonal production is used, it is assumed that inventory buildup will directly match sales for each month and there will be no inventory buildup. The production manager thinks the above assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 20,000 units over 4 months at a level of 5,000 per month. a . What is the ending inventory at the end of each month? Compare the units produced to the units sold and keep a running total. b . If the inventory costs $7 per unit and will be financed at the bank at a cost of 8 percent, what is the monthly financing cost and the total for the four months?...
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 Fall '11
 Soto
 Finance, Balance Sheet, ........., Generally Accepted Accounting Principles, Earnings before Interest

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