Easecom Company is a manufacturer of highly specialized products for networking videoconferencing equipment. Production of specialized units is, to a large extent, performed under contract, with standard units manufactured to marketing projections. With the recent downturn in the computer industry, the videoconferencing equipment segment has suffered, causing a slide in Easecom's performance. Easecom's Income Statement for the fiscal year ended October 31, 19X1, is presented below.

Easecom's return on sales before interest and taxes was 9 percent in fiscal 19X1, while the industry average was 12 percent. Easecom's total asset turnover was three times, and its return on average assets before interest and taxes was 27 percent, both well below the industry average. In order to improve performance and raise these ratios nearer to, or above, industry averages, Bill Hunt, Easecom's president, established the following goals for fiscal 19X2.

To achieve Hunt's goals, Easecom's management team took into consideration the growing international videoconferencing market and proposed the following actions for fiscal \(19 \times 2\).
- Increase equipment sales prices by 10 percent.
- Increase the cost of each unit sold by 3 percent for needed technology and quality improvements, and increased variable costs.
- Increase maintenance inventory by \(\$ 250,000\) at the beginning of the year and add two maintenance technicians at a total cost of \(\$ 136,000\) to cover wages and related travel expenses. These revisions are intended to improve customer service and response time. The increased inventory will be financed at an annual interest rate of 12 percent, no other borrowings or loan reductions are contemplated during fiscal 19X2. All other assets will be held to fiscal \(19 \times 1\) levels.
- Increase selling expenses by \(\$ 250,000\) but hold administrative expenses at \(19 \times 1\) levels.
- The effective rate for \(19 \mathrm{X} 2\) federal and state taxes is expected to be 40 percent, the same as \(19 \times 1\).
It is expected that these actions will increase equipment unit sales by 6 percent, with a corresponding 6 percent growth in maintenance contracts.
{Required:}

a. Compile a financial forecast of an income statement for Easecom Company for the fiscal year ending October 31, 19X2, on the assumption that the proposed actions are implemented as planned and that the increased sales objectives will be met. (All numbers should be rounded to the nearest thousand.)

b. Draft an accountant's compilation report to accompany the financial forecast.

c. Calculate the following ratios for Easecom Company for fiscal year 19X2 and determine whether Bill Hunt's goals will be achieved.
1. Return on sales before interest and taxes.
2. Total asset turnover.
3. Return on average assets before interest and taxes.

d. Discuss the limitations and difficulties that can be encountered in using ratio analysis, particularly when making comparisons to industry averages.

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Easecom Company Income Statement For the Year Ended October 31, 19X1 ($000 omitted) Net Sales Equipment Maintenance contracts Total net sales Expenses Cost of goods sold Customer maintenance Selling expense Administrative expense Interest expense Total expenses Income before income taxes Income taxes Net income $6.000 1.800 7,800 4,600 1.000 600 900 150 7,250 550 220 $ 330