On the basis of financial considerations only, what should Magnuson do? Recommendation Explanation for recommendation
Question:
– On the basis of financial considerations only, what should Magnuson do?
Recommendation –
Explanation for recommendation –
What happens under alternative 1 (use numbers to support)
What happens under alternative 2 (use numbers to support)
What effect does each have on principal repayments and interest?
Requirement 3 – What nonfinancial factors should Magnuson consider?
Consideration 1
Why
Consideration 2
Why
(Feel free to add more)
Requirement 1 information (completed for you)
Cash Budget—Alternative 1: Weave place mats in cotton using existing loom.
ANNE MAGNUSON, WEAVER | |
Cash Budget | |
For the Four Months Ending December 31, 2014 | |
Beginning cash balance | $ 25 |
Cash receipts from the local craft shop [25 sets × {$20/set – (10% × $20/set)}] | 450 |
Cash available | 475 |
Cash payments: | |
Accounts payable balance August 31, 2014 | 74 |
Ending cash balance | $ 401 |
Cash Budget—Alternative 2: Weave place mats in linen using new loom.
ANNE MAGNUSON, WEAVER | |
Cash Budget | |
For the Four Months Ending December 31, 2014 | |
Beginning cash balance | $ 25 |
Cash receipts from the local craft shop [15 sets × {$50/set – (10% × $50/set)}] | 675 |
Cash available | 700 |
Cash payments: | |
Accounts payable balance August 31, 2014 | 74 |
Purchases of linen (15 sets × $18/set) | 270 |
Purchase of new loom | 1,000 |
Interest expense ($1,000 × 18% × 4/12) | 60 |
Total cash payments | 1,404 |
Ending cash balance before financing | (704) |
Financing: | |
Borrowing | 1,000 |
Principal repayments | (200) |
Total effects of financing | 800 |
Ending cash balance | $ 96 |
Decision Case 22-2, cont.
Requirement 1, cont.
Budgeted Income Statement—Alternative 1: Weave place mats in cotton using existing loom.
ANNE MAGNUSON, WEAVER | ||
Budgeted Income Statement | ||
For the Four Months Ending December 31, 2014 | ||
Sales Revenue (25 sets × $20/set) | $ 500 | |
Cost of Goods Sold (25 sets × $7/set) | 175 | |
Gross Profit | 325 | |
Operating Expenses | ||
Sales Commission (10% of sales) | $ 50 | |
Depreciation Expense (4 months × $10/month) | 40 | |
Total Operating Expenses | 90 | |
Net Income | $ 235 | |
Budgeted Income Statement—Alternative 2: Weave place mats in linen using new loom.
ANNE MAGNUSON, WEAVER | ||
Budgeted Income Statement | ||
For the Four Months Ending December 31, 2014 | ||
Sales Revenue (15 sets × $50/set) | $ 750 | |
Cost of Goods Sold (15 sets × $18/set) | 270 | |
Gross Profit | 480 | |
Operating Expenses | ||
Sales Commission (10% of sales) | $ 75 | |
Depreciation Expense [($10/mth. × 4 mths.) + ($20/mth. × 4 mths.)] | 120 | |
Total Operating Expenses | 195 | |
Operating Income | 285 | |
Interest Expense ($1,000 × 18% × 4/12) | 60 | |
Net Income | $ 225 | |
Decision Case 22-2, cont.
Requirement 1, cont.
Budgeted Balance Sheet—Alternative 1: Weave place mats in cotton using existing loom.
ANNE MAGNUSON, WEAVER | ||
Budgeted Balance Sheet | ||
December 31, 2014 | ||
Assets | ||
Current Assets: | ||
Cash | $ 401 | |
Property, Plant, and Equipment: | ||
Loom | 500 | |
Less: Accumulated Depreciation ($240 + $40) | (280) | 220 |
Total Assets | $ 621 | |
Liabilities | $ 0 | |
Stockholders’ Equity | ||
Stockholders’ equity ($386 + $235) | 621 | |
Total Liabilities and Stockholders’ Equity | $ 621 | |
Budgeted Balance Sheet—Alternative 2: Weave place mats in linen using new loom.
ANNE MAGNUSON, WEAVER | ||
Budgeted Balance Sheet | ||
December 31, 2014 | ||
Assets | ||
Current Assets: | ||
Cash | $ 96 | |
Inventory of Cotton | 175 | |
Total Current Assets | $ 271 | |
Property, Plant, and Equipment: | ||
Looms ($500 + $1,000) | 1,500 | |
Less: Accumulated Depreciation ($240 + $120) | (360) | 1,140 |
Total Assets | $ 1,411 | |
Liabilities | ||
Current Liabilities: | ||
Note Payable ($1,000 – $200) | $ 800 | |
Stockholders’ Equity | ||
Stockholders’ equity ($386 + $225) | 611 | |
Total Liabilities and Stockholders’ Equity | $ 1,411 | |
Ethical Issue 22-1
Requirement 1
Ethical issue 1 – (Discuss issue and why it is an issue)
Ethical issue 2 – (Discuss issue and why it is an issue)
Ethical issue 3 – (Discuss issue and why it is an issue)
Requirement 2
Option 1 –
Option 2 –
Option 3 -
Requirement 3
Possible consequences of each of the options listed in Requirement 2 include the following.
· Discussion option 1 consequences – what might happen, what has Dunn already done, what else might Dunn do?
· Discussion option 2 consequences – what might happen, what has Dunn already done, what else might Dunn do?
· Discussion option 3 consequences– what might happen, what has Dunn already done, what else might Dunn do?
Requirement 4 – What should you do?
Option you recommend -
Why?