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·         What conditions would help make a percent-of-sales forecast almost as accurate

as pro forma financial statements and cash budgets?


·         Philip Morris is excited because sales for his clothing company are expected to double from $500,000 to $1,000,000 next year. Philip notes that net assets (Assets – Liabilities) will remain at 50 percent of Sales. His clothing firm will enjoy a 9 percent return on total sales. He will start the year with $100,000 in the bank and is already bragging about the two Mercedes he will buy and the European vacation he will take.

(a) Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit. (Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)

·         The Alliance Corp. expects to sell the following number of units of copper cables at the prices indicated, under three different scenarios in the economy. The probability of each outcome is indicated. What is the expected value of the total sales projection?

Outcome Probability Units Price Total
A 0.30 200 $15 $ 3,000
B 0.50 320 $30 $ 9,600
C 0.20 410 $40 $16,400


·         Draw two break –even graphs —– one for a conservative firm using labor – intensive production and another for a capital – intensive firm. Assuming these companies complete within the same industry and have identical sales, explain the impact of changes in sales volume on both on both firms’ profits.


·         Eaton Tool Company has fixed costs of $200,000, sells its units for
$56, and has variable costs of $31 per unit.
a. Compute the break-even point
b. Ms. Eaton comes up with a new plan to cut fixed costs to
$150,000. How-ever, more labor will now be required, which will increase
variable costs per unit to $34. The sales price will remain at $56. What
is the new break-even point?
c. Under the new plan. What is likely to happen to profitability at very
high volume levels (compared to the old plan)?





·         Shock Electronics sells portable heaters for $25 per unit, and the variable cost to produce them is $17. Mr. Amps estimates that the fixed costs are $96,000.

(a) Compute the break-even point in units.

Break-even point ______ units

(b) Fill in the blanks below (in dollars) to illustrate that the break-even point has been achieved. (Leave no cells blank – be certain to enter “0” wherever required.
Sales $ _________
– Fixed costs _________
– Total variable costs _______
Net Profit (loss) __________