MINICASEPlanning for Growth at S&S Airperiods when Mark and Todd were unable to draw salaries. ToAfter Chris completed the ratio analysis for S&S Air (seeChapter 3), Mark and Todd approached him about planning this end, they would like Chris to prepare a financial plan forfor next year's sales. The company had historically used littleplanning for investment needs. As a result, the company ex-perienced some challenging times because of cash flow prob-lems. The lack of planning resulted in missed sales, as well asthe next year so the company can begin to address any outsideinvestment requirements. The income statement and balancesheet are shown here:SAS AIR, INC.2014 Income StatementSales$40,259,230Cost of goods sold29,336,446Other expenses5,105,1001,804,220$ 4,013,464DepreciationEBIT630,520$ 3,382,9441,353,178$ 2,029,766InterestTaxable incomeTaxes (40%)Net incomeDividends$ 610,000Add to retained earnings1,419,766S&S AIR, INC.2014 Balance SheetAssetsLiabilities and EquityCurrent assetsCurrent liabilitiesAccounts payableNotes payableCash456,43524929,005733,1252,121,350$ 3,050,355$ 5,500,000Accounts receivableInventoryTotal current assets1,073,180$ 2,262,740Total current liabilitiesLong-term debtFixed assets$17,723,430Shareholder equityCommon stockRetained earningsTotal equityTotal liabilities and equityNet plant and equipment$ 400,00011,035,815$11,435,815$19,986,170Total assets$19,986,170fixed assets must be increased in specific amountsbecause it is impossible, as a practical matter, to buy partof a new plant or machine. In this case, a company has a"staircase" or "lumpy" fixed cost structure. Assume S&SAir is currently producing at 100 percent capacity. As aresult, to increase production, the company must set upan entirely new line at a cost of $5000,000. Calculatethe new EFN with this assumption. What does this implyabout capacity utilization for the company next year?QUESTIONS1. Calculate the internal growth rate and sustainable growthrate for S&S Air. What do these numbers mean?2. S&S Air is planning for a growth rate of 12 percent nextyear. Calculate the EFN for the company assuming thecompany is operating at full capacity. Can the company'ssales increase at this growth rate?3. Most assets can be increased as a percentage of sales. Forinstance, cash can be increased by any amount. However,

Internal and Sustainable growth rate: Percentage of growth achieved using company's internal…

Planning for Growth at S&S Air After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning for next year's sales. The company had historically used little planning for investment needs. As a result, the company ex- perienced some challenging times because of cash flow prob- lems. The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Chris to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown here: SAS AIR, INC. 2014 Income Statement Sales $40,259,230 Cost of goods sold Other expenses 29,336,446 5,105,100 1,804,220 $ 4,013,464 630,520 $ 3,382,944 Depreciation EBIT Interest Taxable income Taxes (40%) 1,353,178 Net income $ 2,029,766 Dividends $ 610,000 Add to retained earnings 1,419,766 S&S AIR, INC. 2014 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Cash 24 456,435 Accounts payable 929,005 Accounts receivable 733,125 Notes payable 1,073,180 $ 2,262,740 2,121,350 $ 3,050,355 $ 5,500,000 Inventory Total current liabilities Total current assets Long-term debt Fixed assets $17,723,430 Shareholder equity Common stock Net plant and equipment Retained earnings Total equity Total liabilities and equity $ 400,000 11,035,815 $11,435,815 $19,986,170 Total assets $19,986,170 fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a "staircase" or "lumpy" fixed cost structure. Assume S&S Air is currently producing at 100 percent capacity. As a result, to increase production, the company must set up an entirely new line at a cost of $5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year? QUESTIONS 1. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean? 2. S&S Air is planning for a growth rate of 12 percent next year. Calculate the EFN for the company assuming the company is operating at full capacity. Can the company's sales increase at this growth rate? 3. Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However,

Planning for Growth at S&S Air After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning for next year's sales. The company had historically used little planning for investment needs. As a result, the company ex- perienced some challenging times because of cash flow prob- lems. The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Chris to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown here: SAS AIR, INC. 2014 Income Statement Sales $40,259,230 Cost of goods sold Other expenses 29,336,446 5,105,100 1,804,220 $ 4,013,464 630,520 $ 3,382,944 Depreciation EBIT Interest Taxable income Taxes (40%) 1,353,178 Net income $ 2,029,766 Dividends $ 610,000 Add to retained earnings 1,419,766 S&S AIR, INC. 2014 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Cash 24 456,435 Accounts payable 929,005 Accounts receivable 733,125 Notes payable 1,073,180 $ 2,262,740 2,121,350 $ 3,050,355 $ 5,500,000 Inventory Total current liabilities Total current assets Long-term debt Fixed assets $17,723,430 Shareholder equity Common stock Net plant and equipment Retained earnings Total equity Total liabilities and equity $ 400,000 11,035,815 $11,435,815 $19,986,170 Total assets $19,986,170 fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a "staircase" or "lumpy" fixed cost structure. Assume S&S Air is currently producing at 100 percent capacity. As a result, to increase production, the company must set up an entirely new line at a cost of $5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year? QUESTIONS 1. Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean? 2. S&S Air is planning for a growth rate of 12 percent next year. Calculate the EFN for the company assuming the company is operating at full capacity. Can the company's sales increase at this growth rate? 3. Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However,

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter17: Activity Resource Usage Model And Tactical Decision Making

Section: Chapter Questions

Problem 24P

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