Homework Assignment 2 In Dropbox By Friday, February 5, 11:5

Homework Assignment 2 In Dropbox Friday February 5 By 1159 Pmch

Analyze several financial scenarios including sales projections, break-even point calculations, expected value estimation, external financing requirements, and cash management benefits based on given data from different companies and hypothetical situations. Provide detailed step-by-step computations and explanations for each problem as specified in the assignment.

Paper For Above instruction

The following paper systematically addresses each of the assigned problems, applying relevant financial formulas, concepts, and analytical techniques to arrive at comprehensive solutions. These problems span various key areas of financial management, including sales forecasting, cost-volume-profit analysis, probabilistic sales estimation, working capital planning, and cash management optimization. The detailed calculations demonstrate a practical understanding of core financial principles and their application in business decision-making contexts.

Sales Projections (Chapter 4, Problem 6)

Cyber Security Systems recorded sales of 3,500 units at a unit price of $75 last year. The marketing manager anticipates a 30% increase in unit sales and a 40% increase in price this year, with an 8% return of merchandise from total sales.

Step 1: Calculate projected unit sales:

  • Previous units sold: 3,500 units
  • Projected increase: 30% of 3,500 = 0.30 * 3,500 = 1,050 units
  • Projected units sold for the year: 3,500 + 1,050 = 4,550 units

Step 2: Calculate projected unit price:

  • Previous price per unit: $75
  • Increase: 40% of $75 = 0.40 * $75 = $30
  • Projected price: $75 + $30 = $105

Step 3: Calculate total projected sales before returns:

  • Total sales = projected units projected price = 4,550 $105 = $477,750

Step 4: Deduct returns:

  • Returns = 8% of total sales = 0.08 * $477,750 = $38,220

Step 5: Compute net dollar sales:

  • Net sales = Total sales - Returns = $477,750 - $38,220 = $439,530

Thus, the net dollar sales projection for this year is approximately $439,530.

Break-even Analysis (Chapter 5, Problem 2)

The Hartnett Corporation produces baseball bats selling at $35 each, with a variable cost of $22 per bat. Fixed costs total $97,500. The goal is to determine the break-even point and the sales needed to earn a profit of $262,500.

a. Break-even point in units

The break-even point occurs where total revenues equal total costs:

Sales price per unit = $35

Variable cost per unit = $22

Contribution margin per unit = $35 - $22 = $13

Fixed costs = $97,500

Break-even units = Fixed costs / Contribution margin per unit = $97,500 / $13 ≈ 7,500 units

b. Sales (units) to achieve a profit of $262,500

To find the required units for a target profit:

Total revenue needed = Fixed costs + Target profit

Contribution margin per unit remains $13.

Required units = (Fixed costs + Desired profit) / Contribution margin per unit = ($97,500 + $262,500) / $13 = $360,000 / $13 ≈ 27,692 units

Therefore, approximately 27,692 bats must be sold to realize a profit of $262,500.

Expected Value of Sales (Chapter 6, Problem 1)

Gary’s Pipe and Steel Company estimates sales for the upcoming year based on economic conditions with assigned probabilities:

  • Strong economy: $800,000 with 20% probability
  • Steady economy: $500,000 with 50% probability
  • Weak economy: $350,000 with 30% probability

Expected sales are calculated as the weighted average of the possible outcomes:

Expected sales = (Probability of strong Sales in strong) + (Probability steady Sales steady) + (Probability weak * Sales weak)

= (0.20 $800,000) + (0.50 $500,000) + (0.30 * $350,000)

= $160,000 + $250,000 + $105,000 = $515,000

Hence, the expected sales for the next year are approximately $515,000.

External Financing Needs (Chapter 6, Problem 4)

Antivirus Inc. projects sales of $2,500,000 next year. Inventory and accounts receivable will increase by $480,000. The company's profit margin is steady at 15%, and there is a dividend payout ratio of 35%. No other liabilities increase besides external financing.

Step 1: Calculate projected net income

  • Net income = Sales Profit margin = $2,500,000 0.15 = $375,000

Step 2: Determine retained earnings

  • Retained earnings = Net income (1 - dividend payout ratio) = $375,000 (1 - 0.35) = $375,000 * 0.65 = $243,750

Step 3: Calculate increase in assets (working capital needs)

  • Total increase in assets = $480,000

Step 4: Determine external financing requirement

External financing needed = Total increase in assets - Retained earnings = $480,000 - $243,750 = $236,250

Thus, Antivirus Inc. will need approximately $236,250 in external financing to support next year's sales growth.

Cash Management and Investment Savings (Chapter 7, Problem 1)

City Farm Insurance has reduced collection time by 2 days and increased disbursement time by 1 day, affecting cash flows. The company manages $5 million daily in collections and $3 million daily in disbursements. The investment return rate for excess funds is 12% per annum.

a. Cash freed-up calculation

The net cash flow benefit results from the reduction in collection period and the increase in disbursement period.

  • Net increase in idle cash = (Collection time savings) - (Disbursement time increase)
  • Daily net idle cash = (Savings from collection reduction daily collections) + (Additional disbursement delay daily disbursements)

Since the collection time is reduced by 2 days, the additional cash available is 2 days worth of collections:

  • 2 days of collections = 2 * $5 million = $10 million

Similarly, the disbursement time is increased by 1 day, delaying payments and temporarily freeing up cash equivalent to 1 day's disbursements:

  • 1 day of disbursements = $3 million

Net freed-up cash = $10 million - $3 million = $7 million

Alternatively, considering net effect on idle cash, the total net increase in available cash is approximately $2 million (since the net benefit is primarily driven by the collection reduction minus disbursement delay).

b. Annual earnings from investments

The amount of excess cash is $2 million.

Annual interest earnings = Excess cash annual interest rate = $2,000,000 0.12 = $240,000

Consequently, City Farm Insurance can earn approximately $240,000 annually on the short-term investments enabled by the improved cash management system.

Conclusion

This comprehensive analysis applies fundamental financial principles to assess sales projections, cost-volume-profit thresholds, probabilistic forecasts, working capital requirements, and cash management efficiencies. Each calculation demonstrates the integrative application of mathematical models to real-world business scenarios, providing valuable insights for managerial decision-making and strategic planning.

References

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