Cash $142,100 Accounts Payable $354,155

Barleys and Rivers is a regional food distribution company. Mr. Rivers, CEO, has asked your assistance in preparing cash-flow information for the last three months of this year. Selected accounts from an interim balance sheet dated September 30, have the following balances:

Cash $142,100 Accounts payable $354,155

Marketable securities 200,000 Other payables 53,200

Accounts receivable $1,012,500

Inventories 150,388

Mr. Rivers, CFO, provides you with the following information based on experience and management policy. All sales are credit sales and are billed the last day of the month of sale. Customers paying within 10 days of the billing date may take a 2 percent cash discount. Forty percent of the sales is paid within the discount period in the month following billing. An additional 25 percent pays in the same month but does not receive the cash discount. Thirty percent is collected in the second month after billing; the remainder is uncollectible. Additional cash of $24,000 is expected in October from renting unused warehouse space.

Sixty percent of all purchases, selling and administrative expenses, and advertising expenses is paid in the month incurred. The remainder is paid in the following month. Ending inventory is set at 25 percent of the next month's budgeted cost of goods sold. The company's gross profit averages 30 percent of sales for the month. Selling and administrative expenses follow the formula of 5 percent of the current month's sales plus $75,000, which includes depreciation of $5,000. Advertising expenses are budgeted at 3 percent of sales.

Actual and budgeted sales information is as follows:

Actual: Budgeted:

August $750,000 October $826,800

September $787,500November 868,200

December 911,600

January 930,000

The company will acquire equipment costing $250,000 cash in November. Dividends of $45,000 will be paid in December.

The company would like to maintain a minimum cash balance at the end of each month of $120,000. Any excess amounts go first to repayment of short-term borrowings and then to investment in marketable securities. When cash is needed to reach the minimum balance, the company policy is to sell marketable securities before borrowing. The company will acquire equipment costing $250,000 cash in November. Dividends of $45,000 will be paid in December.

Questions (use of spreadsheet software is recommended):

Prepare a cash budget for each month of the fourth quarter and for the quarter in total. Prepare supporting schedules as needed. (Round all budget schedule amounts to the nearest dollar.)
You meet with Mr. Barleys and Mr. Rivers to present your findings and happen to bring along your PC with the budget model software. They are worried about your findings in Part 1. They have obviously been arguing over certain assumptions you were given.

Mr. Barleys thinks that the gross margin may shrink to 27.5 percent because of higher purchase prices. He is concerned about what impact this will have on borrowings. Comment.
Mr. Rivers thinks that "stock outs" occur too frequently and wants to see the impact of increasing inventory levels to 30 and 40 percent of next quarter's sales on their total investment. Comment on these changes
c. Mr. Barley wants to discontinue the cash discount for prompt payment. He thinks that maybe collections of an additional 20 percent of sales will be delayed from the month of billing to the next month. Mr. Barley says "That's ridiculous! We should increase the discount to 3 percent. Twenty percent more would be collected in the current month to get the higher discount." Comment on the cash flow impacts.

In this case, you have been provided financial information about the company in order to create a cash budget. Management is seeking advice or clarification on three main assumptions the company has been operating. Address Questions 1 and 2 at the end of the case. Written report providing the necessary advice and explanations to management. Conclusions and recommendations. Address Question 1 by using a spreadsheet to prepare the case budget for the fourth quarter. The cash budget should be included as an appendix to the written report and should be referenced in the written report.Address Question 2 in a fully developed explanation of two to four double spaced pages to present the findings and explain or validate the assumptions stated in item (a) through (c). In addressing Question 2, be sure to use the cash budget prepared in Question 1 as support for your explanation.

Be presented as a written analysis (not a question/answer format).

Camilla House is a daycare center/preschool which operates as a partnership of Hernandez and Robinson. The center is in a city that has a large base of twoincome families who have a need for quality day care. The two men started the center this year. Robinson contributed $40,000 to get the business started—to purchase equipment and to operate through the early months. Hernandez, who previously managed another center, is the director of the center and draws $2,000 per month for his services. Partnership profits and losses, after Hernandez's salary, are split 75 percent for Robinson and 25 percent for Robinson. Camilla House operates from 6 a.m. to 6 p.m., Monday through Friday. It is in a single building that has a capacity limit of 120 children and meets city and state regulations. At present, the center has six classes, all at maximum sizes, structured as follows:

Number of classes Children per class Total children Monthly tuition per child

2 to 3 2 10 20 $320

3 to 4 1 15 15 280

4 to 5 1 15 15 280

5 to 6 2 15 30 260

Class sizes are determined by state law which sets a limit on the number of children per instructor. The center uses one instructor per classroom.

Tuition is charged monthly. Minor adjustments are made on an individual basis. In October, the most recent month with data available, revenues were $21,500 ($22,600 less $1,100 adjustments). Monthly revenues should be rather stable since classes are full most of the time.

Expenses for October were:

Salaries for instructors $9,600

Salary of director 2,000

Salary of part-time cook 900

Food expenses 2,200

Staff benefits expenses 2,450

Supplies expenses 600

Occupancy and other administrative

expenses 3,250

Total expenses $21,000

Fixed expenses are the salary of the part-time cook and occupancy and other administrative expenses. The salary of the director is fixed—as a partnership, this is in reality a distribution of profits, but it is included in expenses for comparative purposes. Food is $1.25 per student per day. Staff benefits are 10 percent of salaries plus $200 per person for benefit programs for instructors and the part-time cook. Variable supplies are $1 per student per month. Step costs are salaries for instructors, averaging $1,600 per instructor per class.

Hernandez wants to increase the quality of service by decreasing class sizes and also by expanding student enrollments. These alternatives are interrelated. Hernandez thinks that class sizes are too large and that children are not getting the individual attention they require. Hernandez surveyed parents of all 80 students to measure their support for a tuition increase tied to a reduction in class size. For children ages 2 to 5, most parents would support a 25 percent tuition increase, and nearly 50 percent would support a 50 percent increase. Of the 5-to-6 age group parents, nearly three fourths did not want any increase. The remainder said they would support a 25 percent increase but no more.

Proper class size is very subjective. However, Hernandez feels that he could achieve a child/ instructor ratio of 6 to 1 for the 2-to-3 age group, an 8 to 1 ratio for the 3-to-4 and 4-to-5 age groups, and a 10 to 1 ratio for the 5-to-6 age group. The center has easily maintained the 80-student level, with each class full. keeps in touch with waiting-list parents to make certain each is still interested. This list provides children when someone leaves the center. The current waiting list is as follows:

Age group Number of children Age group Number of children

2 to 3 5 4 to 5 4

3 to 4 7 5 to 6 11

Hernandez does not start a new class unless more students are on the waiting list than are required per class. Obviously, enough students are on the 5-to-6 age group waiting list to start a new class. Lately, however, he has wondered if the center could make a profit by starting classes with fewer than the requisite number, taking the chance that new students would appear and could be added immediately.

Information from his various inquiries implies that a potential market for quality infant care (0 to 24 months) exists. Hernandez doesn't think this expansion would be profitable. However, he has never done an analysis of the situation and has not thought about an appropriate tuition. He believes that the infant/instructor ratio in his center should be no higher than 5 infants to one instructor. The center would have no food costs for the infants.

Robinson will only agree to Hernandez 's suggested changes if the center will continue to operate at or above the current profit level. Friedman does not start a new class unless more students are on the waiting list than are required per class. Obviously, enough students are on the 5-to-6 age group waiting list to start a new class. Lately, however, he has wondered if the center could make a profit by starting classes with fewer than the requisite number, taking the chance that new students would appear and could be added immediately.

Questions:

1. Look at each decision separately, as incremental to the current situation, and evaluate the marginal profit:

a. If class size is decreased (keeping the same 80 students), what increase in tuition is necessary to keep the current monthly profit level?

b. Without regard to (a), is it profitable to create the new class from the waiting list?

Explain.

c. Use the new fee structure as found in (a). Is it profitable to move to smaller class sizes, if new full classes are created and filled to their new maximums using the waiting list? Show calculations.

d. Is a class for infant care profitable if tuition is the same as the proposed class tuition for the 2-to-3 age group?

2. Write a brief memo to Hernandez and Robinson highlighting any concerns that underlie the analyses you have performed in Part 1.

In this case, management is presented with several decision options. For this assignment, you are required to provide a two to three single-spaced written memo evaluating options and providing recommendations. The written memo should be properly formatted according to APA guidelines and demonstrate research and critical thinking skills. Evaluations and recommendations should be supported

In Question 1, evaluate each decision separately in full detail including calculations, as necessary. The evaluation should be included as part of the memo discussion, not a separate component. Evaluations can be included as appendices, exhibits or figures; however must be properly referenced within the written content.
In Question 2, prepare a comprehensive business memo addressing each decision and your recommendation. The memo should be properly formatted as a business memo and formatted according to APA guidelines.

Sample Memo

Summary:

This handout will help you solve your memo-writing problems by discussing what a memo is, describing the parts of memos, and providing examples and explanations that will make your memos more effective.

Contributors:Courtnay Perkins, Allen Brizee
Last Edited:2011-05-17 05:29:24

TO: Kelly Anderson, Marketing Executive

FROM: Jonathon Fitzgerald, Market Research Assistant

DATE: June 14, 2007

SUBJECT: Fall Clothes Line Promotion

Market research and analysis show that the proposed advertising media for the new fall lines need to be reprioritized and changed. Findings from focus groups and surveys have made it apparent that we need to update our advertising efforts to align them with the styles and trends of young adults today. No longer are young adults interested in sitcoms as they watch reality televisions shows. Also, it is has become increasingly important to use the internet as a tool to communicate with our target audience to show our dominance in the clothing industry.

Internet Advertising

XYZ Company needs to focus advertising on internet sites that appeal to young people. According to surveys, 72% of our target market uses the internet for five hours or more per week. The following list shows in order of popularity the most frequented sites:

Google
Facebook
Myspace
EBay
iTunes

Shifting our efforts from our other media sources such as radio and magazine to these popular internet sites will more effectively promote our product sales. Young adults are spending more and more time on the internet downloading music, communicating and researching for homework and less and less time reading paper magazines and listening to the radio. As the trend for cultural icons to go digital, so must our marketing plans.

Television Advertising

It used to be common to advertise for our products on shows likeFriendsandSeinfeldfor our target audience, but even the face of television is changing. Young adults are tuning into reality television shows for their entertainment. Results from the focus group show that our target audience is most interested in shows likeAmerican Idol,The Apprentice, andAmerica's Next Top Model. The only non-reality television show to be ranked in the top ten most commonly watched shows by males and females 18-25 isDesperate Housewives. At Blue Incorporated, we need to focus our advertising budget on reality television shows and reduce the amount of advertising spent on other programs.

By refocusing our advertising efforts of our new line of clothing we will be able to maximize the exposure of our product to our target market and therefore increase our sales. Tapping into the trends of young adults will help us gain market share and sales through effective advertising.