The Protek Company has been growing very fast, but profitability has declined from 11.85% to 2.36% in just two years. Costs have increased faster than sales and expenses are out of control. The Board of Directors has appointed Bob Smith to come up with some recommendations that are likely to help get the situation under control. He has made the following suggestions, but has hired you to actually put the numbers into proforma statements to present to the Board at their next meeting. Income Statement The company will slow down the growth of sales to 15% for the next year (20X4). Bob does not see any easy fixes to the cost of good sold situation, so those will go up 15% in line with sales, leading to the same gross margin percent as this past year. Bob has decided that the budgets for the Marketing and Research and Development departments should be exactly the same dollar amount as in 20X3. He feels that imposing that particular discipline to the Marketing Department will be good for them after such outrageous increases in spending over the last two years. The Research and Development Department has not increased their spending by much, but they haven’t been producing very much in the way of new products either. Bob wants to send a message here. Bob will allow the Administration Department to spend $300,000,000 a very small increase over last year. He expects this group to bring receivables under control as a priority. Bob believes that you should use $160,000,000 as the first guess at interest charges. The tax rate is still 34%. Balance Sheet Bob wants to hold the cash balance at $60 million. He has charged the staff in Administration to get the ACP down to 60 days in 20X4. He believes that inventory turn can be improved back to 6 times. Depreciation is expected to be the same as in 20X3 ($275 million) with no changes in Gross Fixed Assets. He believes that accruals will stay at $30,000,000 and Accounts Payable should end the year around $150 million. The company will continue to use Long Term Debt as the source of funds needed to balance the Balance Sheet. You need to complete the proforma statements for 20X4 and complete the comparative ratio analysis. You also need to write a short analysis indicating how much Bob’s changes will help the Company regain its position relative to the Industry. Note: Statements are shown in millions ($000,000s) on the spreadsheet.
The Protek Company has been growing very fast, but profitability has declined from 11.85% to 2.36% in just two years. Costs have increased faster than sales and expenses are out of control. The Board of Directors has appointed Bob Smith to come up with some recommendations that are likely to help get the situation under control. He has made the following suggestions, but has hired you to actually put the numbers into proforma statements to present to the Board at their next meeting. Income Statement The company will slow down the growth of sales to 15% for the next year (20X4). Bob does not see any easy fixes to the cost of good sold situation, so those will go up 15% in line with sales, leading to the same gross margin percent as this past year. Bob has decided that the budgets for the Marketing and Research and Development departments should be exactly the same dollar amount as in 20X3. He feels that imposing that particular discipline to the Marketing Department will be good for them after such outrageous increases in spending over the last two years. The Research and Development Department has not increased their spending by much, but they haven’t been producing very much in the way of new products either. Bob wants to send a message here. Bob will allow the Administration Department to spend $300,000,000 a very small increase over last year. He expects this group to bring receivables under control as a priority. Bob believes that you should use $160,000,000 as the first guess at interest charges. The tax rate is still 34%. Balance Sheet Bob wants to hold the cash balance at $60 million. He has charged the staff in Administration to get the ACP down to 60 days in 20X4. He believes that inventory turn can be improved back to 6 times. Depreciation is expected to be the same as in 20X3 ($275 million) with no changes in Gross Fixed Assets. He believes that accruals will stay at $30,000,000 and Accounts Payable should end the year around $150 million. The company will continue to use Long Term Debt as the source of funds needed to balance the Balance Sheet. You need to complete the proforma statements for 20X4 and complete the comparative ratio analysis. You also need to write a short analysis indicating how much Bob’s changes will help the Company regain its position relative to the Industry. Note: Statements are shown in millions ($000,000s) on the spreadsheet.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Concept explainers
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Question
The Protek Company has been growing very fast, but profitability has declined from 11.85% to 2.36% in just two years. Costs have increased faster than sales and expenses are out of control. The Board of Directors has appointed Bob Smith to come up with some recommendations that are likely to help get the situation under control. He has made the following suggestions, but has hired you to actually put the numbers into proforma statements to present to the Board at their next meeting.
Income Statement
- The company will slow down the growth of sales to 15% for the next year (20X4). Bob does not see any easy fixes to the cost of good sold situation, so those will go up 15% in line with sales, leading to the same gross margin percent as this past year.
- Bob has decided that the budgets for the
Marketing and Research and Development departments should be exactly the same dollar amount as in 20X3. He feels that imposing that particular discipline to the Marketing Department will be good for them after such outrageous increases in spending over the last two years. The Research and Development Department has not increased their spending by much, but they haven’t been producing very much in the way of new products either. Bob wants to send a message here. - Bob will allow the Administration Department to spend $300,000,000 a very small increase over last year. He expects this group to bring receivables under control as a priority.
- Bob believes that you should use $160,000,000 as the first guess at interest charges.
- The tax rate is still 34%.
- Bob wants to hold the cash balance at $60 million.
- He has charged the staff in Administration to get the ACP down to 60 days in 20X4.
- He believes that inventory turn can be improved back to 6 times.
- Depreciation is expected to be the same as in 20X3 ($275 million) with no changes in Gross Fixed Assets.
- He believes that accruals will stay at $30,000,000 and Accounts Payable should end the year around $150 million.
- The company will continue to use Long Term Debt as the source of funds needed to balance the Balance Sheet.
You need to complete the proforma statements for 20X4 and complete the comparative ratio analysis. You also need to write a short analysis indicating how much Bob’s changes will help the Company regain its position relative to the Industry.
Note: Statements are shown in millions ($000,000s) on the spreadsheet.
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1 Protek Company Income Statements
Common
Actual
Common
Common
2
20X1
Size
Growth
20X2
Size
Growth
20X3
Size
3 Sales
1578.00
1.00
0.33
2106.00
1.00
0.55
3265.00
1.00
4 COGS
631.00
0.40
0.44
906.00
0.43
0.66
1502.00
0.46
Gross Margin
6 Expenses
947.00
0.60
0.27
1200.00
0.57
0.47
1763.00
0.54
7
Marketing
316.00
0.20
0.57
495.00
0.24
0.78
882.00
0.27
R&D
158.00
0.10
0.34
211.00
0.10
0.55
327.00
0.10
Admin
126.00
0.08
0.42
179.00
0.08
0.64
294.00
0.09
10
Total
600.00
0.38
0.48
885.00
0.42
0.70
1503.00
0.46
11 EBIT
347.00
0.22
-0.09
315.00
0.15
-0.17
260.00
0.08
12 Interest
63.00
0.04
0.51
95.00
0.05
0.51
143.00
0.04
13 EBT
284.00
0.18
-0.23
220.00
0.10
-0.47
117.00
0.04
14 Tax
97.00
0.06
-0.23
75.00
0.04
-0.47
40.00
0.01
15 Net Income
187.00
0.12
-0.22
145.00
0.07
-0.47
77.00
0.02
16
17
18 Protek Balance Sheets
Changes X2-X1
Changes X3-X2
19
20 Cash
30
10
40
22
62
21 AR
175
176
351 use
239
590 use
22 Inventory
90
61
151 use
149
300 use
23 Current Assets
295
247
542
410
952
24
25 Fixed assets
26
Gross
1565
808
2373 use
345
2718 use
27
Acc Depn
-610
-250
-860
-275
-1135
28
Net
955
558
1513
70
1583
29
30 Total Assets
1250
805
2055
480
2535
31
32 AP
56
25
81 source
53
134 source
33 ACC
15
5
20 source
10
30 source
34 Current Liabilities
71
30
101
63
164
35
change in NWC
-207
-325
36 Capital
37
LTD
630
630
1260 Source
340
1600 source
38
Equity
549
145
694 Source
77
771 source
39 Total Liabilities and Equity
1250
805
2055
480
2535
40
41 Ratios
Industry
20x1
20X2
20X3
42 Current
4.5
4.15493
5.366337
5.804878
43 Quick
3.2
2.887324
3.871287
3.97561
44 ACP
42
39.92395
60
65.0536
Sheet1
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44 ACP
42
39.92395
60
65.0536
45 Inv Turn
7.5
7.011111
6
5.006667
46 FA Turn
1.6
1.652356
1.391937
2.062539
47 TA Turn
1.2
1.2624
1.024818
1.287968
48 Debt Ratio
0.53
0.5608
0.662287
0.695858
49 Debt:Equity
1
1.147541
1.815562
2.075227
50 TIE
4.5
5.507937
3.315789
1.818182
51 ROS
0.09
0.118504
0.068851
0.023583
52 ROA
0.108
0.1496
0.07056
0.030375
53 ROE
0.228
0.340619
0.208934
0.09987
54 Equity Multiplier
2.1
2.276867
2.961095
3.287938
55
56 EPS
1.87
1.45
0.77
57 P/E
21
18
15
58 STOCK PRICE
39.27
26.1
11.55
59
60 Cash Flows
X2
X3
61 Net Income
145
77
62 Depreciation
250
275
63 Change in Wc
64 Operating Activities
-207
-325
188
27
65
66 Investing Activities
808
345
67
68 Financing Activities
69
LT Debt
630
340
70
71 Net Cash Flow
10
22
72
73 Beginning cash
30
40
74 Net Cash Flow
10
22
75 Ending Cash
40
62
76
77
78
79
80
81
82
83
84
85
86
87
Sheet1
+
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