Solution For Averbrugge Publishing Company Balance Sheet

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Identify the core assignment question: Given a set of financial data, including the balance sheet assets, liabilities, income statement figures, and details of a reorganization process, analyze the financial position, profitability, and the impact of reorganization on financial ratios such as debt ratio. Additionally, using projected revenues and costs by departments, calculate overhead allocation rates via the direct method, and determine the price needed to achieve a desired profit based on variable and fixed costs.

Paper For Above instruction

Understanding the financial health of a corporation involves comprehensive analysis of its balance sheet, income statement, and operational data. In this essay, an in-depth examination of Verbrugge Publishing Company's financial statements and reorganization effects is conducted, alongside an allocation of departmental overhead costs and price determination based on cost-volume-profit analysis.

Financial Position and Leverage Post-Reorganization

The initial balance sheet of Verbrugge Publishing indicates total assets of $327, with current assets at $159 and net fixed assets at $153. The liabilities comprise current liabilities of $42, advance payments of $78, and long-term debt in the form of 8% debentures valued at $90. The equity section includes preferred stock of $45, common stock of $9, and retained earnings of $57, culminating in total liabilities and equity of $327. This structure indicates a moderate leverage, but the reorganization alters this financial leverage markedly.

Prior to reorganization, the company's debt ratio, calculated as total debt over total assets, stands at approximately 35.71%. This ratio reflects a conservative leverage position, with manageable debt levels. The reorganization increases total debt by adding \$90 million in debentures, raising leverage to roughly 64.22%. Such a significant increase suggests higher financial risk; even though the company may benefit from favorable interest deductibility, the increased debt burden could jeopardize financial stability, especially under adverse economic conditions.

Profitability Analysis and Impact of Reorganization

The income statement details a net sales figure of $540 million, with operating expenses totaling $516 million, resulting in a Net Operating Income of $24 million. After accounting for other income and interest expenses, earnings before tax amount to $19.8 million, with a tax expense of $9.9 million. The net income for shareholders is $9.9 million, with preferred dividends of $2.88 million, leaving $7.02 million attributable to common stockholders.

Analyzing the reorganization's impact, we observe that the earnings required to meet post-reorganization financial commitments will be higher due to increased interest obligations. Initially, earnings needed before recapitalization are calculated at $7.8 million divided by (1 - 0.5) = $15.6 million. Post-reorganization, the firm needs $5.8 million to cover preferred dividends and $7.2 million for interest, totaling $13 million pre-tax. The earnings requirement decreases by $2.6 million after reorganization, but the ratios and risk profiles change significantly, potentially hampering dividend payouts and growth prospects.

Departmental Cost Allocation via the Direct Method

The cost allocation exercise considers projected revenues and costs for different patient services departments: Routine care, Laboratory, and Radiology. Total revenues amount to $22.5 million, with direct costs totaling $8.15 million. Support services incur overhead costs of $9.4 million, distributed across financial services, facilities, housekeeping, administration, and personnel, with total overhead exceeding direct costs.

Using the direct method, each support department's overheads are allocated to patient service departments based on specific cost drivers. For example, financial services overhead is allocated based on patient service revenue, with an allocation rate of approximately 4.44% ($1,000,000 / $22,500,000). Similarly, facilities costs are allocated based on square footage, with an allocation rate of approximately 1.0 dollar per square foot ($2,600,000 / 260,000 sq ft). Housekeeping costs are distributed based on labor hours, and administration and personnel costs are assigned based on salary dollars. These calculations enable precise cost control and profitability assessment at the departmental level.

Price Setting for Target Profit in a Cost-Volume-Profit Context

The final segment involves computing the price needed to achieve a target profit of $650,000, considering variable costs per visit and fixed costs. Variable costs per visit are $10, with projected visits of 10,000, totaling $100,000 variable costs. The annual fixed costs, including overhead and other fixed expenses, amount to $500,000, with an additional overhead of $50,000, culminating in total costs of $650,000.

To determine the requisite price for the desired profit, the contribution margin per visit must be considered. The total revenue needed to cover both costs and profit is $1,300,000 ($650,000 fixed costs + $650,000 profit). Dividing this by the number of visits yields a price of approximately $130 per visit ($1,300,000 / 10,000 visits). This price ensures the organization covers all costs and achieves the specified profit margin.

Conclusion

This comprehensive analysis underscores the importance of evaluating financial ratios and operational costs when considering restructuring or cost management strategies. Adequate allocation of overhead costs enhances managerial decision-making, while understanding the relationship between costs, pricing, and profit ensures sustainable operations. Organizations must carefully balance leverage, profitability, and operational efficiency to maintain financial health and competitive advantage in dynamic healthcare and publishing industries.

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