You have been engaged by Markus Industries to examine its projected financial statements for 2011.
For each of the following, state the evidence sources and procedures you would use to evaluate the reasonableness of the assumption.
(a) The Molding Division’s sales forecast assumes that the Orlando facility will be completed and operating at 42% of capacity on February 2, 2011. It is highly improbable that the facility will be operational before December 31, 2010. For every month’s delay in opening the facility, the sales of the Molding Division are reduced by $82,000 and operating earnings are reduced by $32,000.
b. Markus intends to sell certain real estate and facilities held by the Assembly Division at an after-tax profit of $625,000. The proceeds of this sale will be used to retire outstanding debt (described in c).
c. Markus will call and retire all outstanding 8% subordinated debentures (callable at 107). Given the present interest rate of 7% on similar debt, it is expected that the debentures will require the full call premium. A rise in market interest rates to 8% would reduce the loss on bond retirement from the projected $195,000 to $185,000.