Gradestman 625 Final Exam Summer 2014 Questions And Instruct

Gradestman 625 Final Exam Summer 2014 questions and instructions

Gradestman 625 Final Exam Summer 2014 questionscore10203040name5060708

Grades TMAN 625 Final Exam, Summer 2014 Question Score Name Late 0 Total 0 Q1 Question 1 Score 0 Awesome Gadget, INC is considering making an additional investment in its production capabilities. It has collected data on the past year's (year 0) revenue, costs and quantity sold. Future Sales quantities are forecasted to be as shown in the data block below. The price per unit will be increased $2.50 annually (year-1 unit price = year-0 unit price + $2.50, year-2 price = Year-1 price + $2.50, etc.) COGS per unit produced is forecast to decrease 5% annually (cost per unit in year-1 to be 5% less than the year-0 unit cost, year-2 unit cost will be 5% less than year-1, etc.) Fixed cost (S.G. & A.) excluding depreciation will be constant for all years.

Depreciation for each year is to be as shown in the data block (does not have to be calculated). Using this data, prepare a three year proposal income statement (only) for years 1-3 using items from the following data block as needed. The income statement must be in the standard accounting sequence and format with appropriate totals. Years Revenue in year 0 $3,211,000.00 COGS - year 0 $2,281,500.00 Quantity produced/sold 84,500 Forecasted sales quantities 95,000 Working capital $750,000.00, $720,000.00, $690,000.00, $650,000.00 Depreciation $540,000.00, $510,000.00, $460,000.00, $400,000.00 Investment $350,000.00 S.G. & A. $1,258,000.00 Income Tax rate 14.00% MARR 20.00% Unit price increase $2.50 annually Unit COGS decrease 5.00% annually

Paper For Above instruction

A comprehensive financial analysis for Awesome Gadget, Inc. involves projecting the company’s income statement for the upcoming three years based on forecasted sales, costs, and pricing strategies. This process requires integrating historical data with assumptions about price increases and cost reductions, culminating in a standard format income statement that facilitates investment decision-making and strategic planning.

Introduction

Financial forecasting plays an essential role in assessing an investment’s viability. For Awesome Gadget, Inc., the objective is to develop a three-year projected income statement incorporating forecasted sales, costs, and depreciation while maintaining consistency with the company's strategic assumptions. The projections leverage historical data, including revenue, cost of goods sold (COGS), and fixed expenses, and adjust these figures annually based on specified percentage changes in sales prices and costs. The analysis also considers depreciation and tax impacts to determine net income, which informs the financial attractiveness of the investment.

Methodology

The approach begins with baseline data from Year 0, including revenues, COGS, and quantity sold. The annual forecasting includes incrementally increasing the unit sales price by $2.50 each year and decreasing unit COGS by 5%. The quantity sold is forecasted at the specified figures for Years 1-3. Fixed costs, excluding depreciation, are held constant. Depreciation schedules are derived from given data, assuming straight-line or appropriate MACRS rates. Taxation is applied at 14%, reducing net income to reflect government obligations. The final project constructs the income statement sequence: Revenue, COGS, Gross Profit, SGA expenses, Depreciation, Earnings Before Tax, Taxes, and Net Income.

Forecasting Revenue

The unit price for Year 0 is unknown, but the previous year's revenue is given at $3,211,000. The forecasted revenue for subsequent years is calculated by multiplying forecasted quantities with the increased unit price. Since the initial unit price can be derived from Year 0 revenue divided by the Quantity Sold, this value serves as the baseline for future projections. Each subsequent year's unit price increases by $2.50, and the forecasted sales quantities are multiplied by these updated prices to estimate revenues.

Calculation of Cost of Goods Sold

Similarly, COGS per unit is decreased by 5% each year. The Year 0 unit COGS per unit is calculated from $2,281,500 divided by the quantity sold (84,500). The subsequent years’ unit COGS are reduced by 5% annually. Total COGS per year equals unit COGS multiplied by forecasted quantities. These computations facilitate deriving gross profit margins for each year.

Expense and Depreciation Considerations

Fixed operational costs, such as S.G. & A., are held constant at $1,258,000. Depreciation expenses are provided for each year; these are deducted after gross profit to determine earnings before interest and taxes (EBIT). Telescoped with the depreciation schedule, the analysis reflects the non-cash expense impact on taxable income, thus influencing cash flow and investment appraisal.

Taxation and Net Income

Income taxes are computed at 14% of pre-tax income in each year. The taxes are deducted to arrive at the net income, which provides an essential indicator of profitability and supports further cash flow analyses for investment appraisal. The projection therefore offers a comprehensive view of future profitability, supporting capital budgeting decisions.

Conclusion

This detailed income statement projection enables Awesome Gadget, Inc. to evaluate the financial implications of expanding production capacity through their forecasted three-year income statements. It combines assumptions about pricing, costs, amortization, and taxation, ensuring the company’s strategic decisions are based on solid, quantifiable financial insights.

References

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• Robin, A. (2019). Financial Statement Analysis: A Practitioner's Guide. Wiley.
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