Fantastic's revenues increased rapidly from the beginning.  In fiscal 1979 and 1980, the first

two full years of operations, Fantastic had sales of $3.1 million and $9.9 million, respectively.  Net

profits in those years were $72,000 and $109,000, as shown in Exhibit 1. Although 1980 revenues

had increased 213 percent from the prior year, net income rose only 48 percent because of

substantially higher costs.  Increased rent, advertising, bad debts, and interest costs had caused

selling, general, and administrative costs to increase by over 250 percent.

Fan sales were seasonal, with over 65 percent of revenues coming between April and

September, as shown in Exhibit 2. Sales were made by salespeople working exclusively on

commission.  Commissions were paid in the same month the sales were made.  The company served

more than 100 customers, including many small accounts as well as mass-merchandisers and home

center stores such as Kmart, J. C. Penney, Zayre, Ace Hardware, Best Products, and 84 Lumber.

Two customers, however, had accounted for approximately 40 percent of total sales in 1980.

Salespeople wrote and confirmed the orders with no penalty for cancellation.  Customers

typically paid between 60 and 90 days after Fantastic shipped the merchandise.  Accounts receivable

were of good quality, although the bad debts/sales ratio was 2.1 percent in 1980 because of unpaid

accounts from some small stores.  Balance sheets for the period are shown in Exhibit 3.

The lead time for Fantastic's orders was 60 days—30 days for their suppliers to manufacture

the fan parts once the order had been received and 30 days for shipping. 

 

Prepare forecasts of Fantastic's income statement and balance sheet for 1981 and 1982

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4 Exhibit 1 FANTASTIC MANUFACTURING, INC. Income Statements (in thousands) UVA-F-0764 Year Ending January 31, 1979 January 31, 1980 Three Months Ending April 31, 1980 Six Months Ending July 31, 1980 Net revenues $3,155 $9,860 $6,693 $15,818 Cost of goods sold 2,263 7,306 4,543 10,310 Gross profit 892 2,554 2,150 5,580 Salaries and payroll taxes 252 308 Commissions 19 149 487 Freight 19 62 Rent 0 128 Bad debts 24 209 Interest' 78 496 Other selling, general, and administrative Total operating expenses Income before taxes Taxes Net income before extraordinary item Extraordinary item (net of income tax credit) Net income 278 709 800 2.399 1,615 3,428 155 535 2,080 47 239 998 108 296 1,082 0 0 (94) $ 73 $ 108 $ 296 $ 988 'Includes line-of-credit charges. 4 Exhibit 1 FANTASTIC MANUFACTURING, INC. Income Statements (in thousands) UVA-F-0764 Year Ending January 31, 1979 January 31, 1980 Three Months Ending April 31, 1980 Six Months Ending July 31, 1980 Net revenues $3,155 $9,860 $6,693 $15,818 Cost of goods sold 2,263 7,306 4,543 10,310 Gross profit 892 2,554 2,150 5,580 Salaries and payroll taxes 252 308 Commissions 19 149 487 Freight 19 62 Rent 0 128 Bad debts 24 209 Interest' 78 496 Other selling, general, and administrative Total operating expenses Income before taxes Taxes Net income before extraordinary item Extraordinary item (net of income tax credit) Net income 278 709 800 2.399 1,615 3,428 155 535 2,080 47 239 998 108 296 1,082 0 0 (94) $ 73 $ 108 $ 296 $ 988 'Includes line-of-credit charges.