Engr 801: Engineering Management Fall 2004 Professor Marzo Project #3 1) Tek Corporation ended 2003 with cash of $50,000, accounts receivable of $100,000, and inventory of $300,000. Property, plant, and equipment were valued at their original cost of $470,000, less accumulated depreciation of $170,000. Current liabilities other than income taxes owed (see below) were $120,000 and long-term debt was $250,000. Stockholder s equity consisted of (i) $90,000 common stock and (ii) accumulated retained earnings, which totaled $130,000 at the end of 2002. Net sales for 2003 were $900,000. Expenses included $500,000 cost of goods sold, $50,000 depreciation expense, $85,000 selling expense, and $65,000 general and administrative expense. Interest income and expense were $5,000 and $25,000, respectively, and income taxes for the year (unpaid at the year s end) were $80,000. Dividends of $20,000 had been declared and accrued but were not paid at the year s end. In the space provided below, prepare an income statement and balance sheet for 2003 reflecting these figures. (8 points) Income Statement Net Sales $900,000 Less: Cost of Goods Sold 500,000 Gross Profit $400,000 Less: Expenses Depreciation $50,000 Selling Expenses 85,000 General & Admin. Expenses 65,000 200,000 Operating Profit $200,000 Plus: Interest and Other Income 5,000 Less: Interest on LT Debt 25,000 Income Before Taxes $ 180,000 Less: Provision for Federal Income Taxes 80,000 Net Income $ 100,000 Balance Sheet ASSETS Current Assets Cash $ 50,000 Accounts Rec. 100,000 Inventory 300,000 Total Current Assets $450,000 Property, Plant & Equip. 470,000 Less Accum. Deprec. 170,000 Net PP&E 300,000 Total Assets $750,000 LIABILITIES AND STOCKHOLDER S EQUITY Current Liabilities Income Taxes Payable $ 80,000 Other Current Liab. 120,000* Total Current Liab. $200,000 Long-Term Debt 250,000 Total Liabilities $450,000 Stockholder s Equity Capital Stock $90,000 Retained Earnings 210,000 300,000 Total Liabilities and Equity $750,000 * Includes $20,000 dividend declared but unpaid Page 1 of 1
2. If in #1 above, the market value of inventory was $250,000, in the space provided below please state: (4 points) (a) What amount is required under Generally Accepted Accounting Principles to be reflected on the balance sheet for inventory? $250,000 (b) State the one overriding Generally Accepted Accounting Principle that requires this answer? Lower of Cost or Market Value 3. Using the inputs from #1 above, in the space and format provided below, calculate the financial ratios listed below, stating the formula (in words), the numerical calculation based on the formula, and the resulting value, and comment on the values obtained. Use 2003 yearend numbers where averages are normally used, and assume all sales are made on credit. (4 points) Ratio Formula Calculation/Result (a) Current Ratio Current Assets $450,000 = 2.25 Current Liabilities $200,000 (b) Inventory Turnover Cost of Goods Sold $500,000 = 1.67 Average Inventory $300,000 (c) Accounts Receivable Turnover Net Credit Sales $900,000 = 9.00 Trade A/R $100,000 (d) Prime Ratio (Return on Total Assets) Net Income $100,000 = 13.3% Comments: Avg. Total Assets $750,000 Although wise ratio analysis requires an understanding of the industry, the economy, and the company s past history, one might reasonably observe: (a) the current ratio of 2.25 appears healthy, since a ratio over 1 is generally considered acceptable; (b) inventory turnover of 1.67 indicates there are 12/1.67 or 7.2 months inventory on hand, which is very high for most industries; (c) accounts receivable turnover of 9.00 indicates an average payment period of 360/9.0 or 40 days, which can be evaluated against industry and company standards; and (d) an after tax return of 13.3% of total assets would be welcome in many industries. 4. Which of the following characteristics distinguish an effective budget system from an ineffective one (circle one answer): (4 points) (a) Results are timely and understandable (b) Is generally based on contingent budgets (c) Highlight serious deviations (actual to budget) (d) Is tailored to the needs of the organization and management (e) Generally cover periods in excess of one year (f) All of the above (g) Characteristics (a), (c), (d), and (e) (h) Characteristics (a), (c), and (d) Page 2 of 2
5. Modern accounting systems generally ignore the accumulation of costs for purposes of (circle one): (4 points) (a) inventory valuation (b) income determination (c) both of (a) and (b) (d) neither (a) and (b) 6. When manufacturing volume increases, variable costs will be (circle one): (4 points) (a) less per product unit (b) more per product unit (c) unchanged per product unit 7. As production volume decreases, fixed costs (circle one): (4 points) (a) become smaller on a per unit basis (b) remain the same per unit (c) become larger on a per unit basis 8. Overtime premium paid for direct labor should usually be considered part of (circle one): (4 points) (a) direct materials cost (b) direct labor costs (c) factory overhead costs (d) non-manufacturing costs 9. The breakeven point is usually designated in terms of (circle one): (4 points) (a) product selling prices (b) expenses or costs (c) number of employees (d) capital invested or size of factory (e) product units or dollars of sales 10. Contribution margin in dollars is (circle one): (4 points) (a) sales minus net income (b) variable expenses minus fixed expenses (c) sales minus variable expenses (d) net income minus fixed expenses (e) none of the above Page 3 of 3
11. The breakeven point would tend to decrease by (circle one): (4 points) (a) an increase in fixed costs (b) a decrease in the contribution-margin percentage/ratio (c) either of the above (d) none of the above 12. Answer the following problem in the space provided. (5 points) Assume: Fixed Expenses $480 Sales price per product unit $15 Variable expenses per unit $9 Find: 1. Contribution margin per product unit. $6.00 and 40% 2. Breakeven sales. 80 units 3. Sales that will produce a net income of $120 100 units 4. Sales that will produce a net income of 20% of sales 160 units 13. An engineer proposes to buy a machine for $100,000 today that will save $60,000 in labor costs at the end of each of then next two years. In the space provided below and showing your calculations (in words and formula): (4 points) (a) If the company demands a 15% return on investments such as this, what is the net present value [NPV] of the proposal? The present value of benefits is ($60,000/1.15 + $60,000/(1.15) 2 ) = $97,543, with the NPV being ($2,457), or $97,543-$100,000. (b) Should the investment be funded and why? No. Since the amount invested is less than the present value of future benefits at the desired return rate, the proposal should not be funded if the company continues to demand a 15% return on investments such as this. 14. Your company has two alternative opportunities, each requiring your entire capital investment budget of $325,000. Alternative A will return $390,000 at the end of one year; alternative B will return $216,000 at the end of each of the first two years. In the space provided below and showing your calculations (in words and formulas), which (if either) alternative should you recommend on the basis of: (6 points) (a) Simple payback period and time (show both types of payback calculations)? Alt. A A: Simple Payback Method: (325/390) =.83 years Simple Payback Time: 1 year-- all benefits are realized at the end of Year 1 B: Simple Payback Method: (325/216) = 1.5 years Simple Payback Time: 2 years-- full benefits are not realized until the end of Year 2 Page 4 of 4
(b) Net Present Value assuming a 20% return is desired? Choose Alt. B -- higher NPV NPV A = -325,000 + 390,000/1.2 = $0 NPV B = -325,000 + 216,000/1.2 + 216,000/1.2 2 = $5,000 (c) Why are the Payback Methods used in investment analysis not as reliable as the Net Present Value method? The NPV method takes into consideration the time value of money, but the payback methods do not. 15. In purchasing process materials, specifically steel sheet and rods, a buyer in the purchasing department (not an engineer) is offered material with slightly different specifications at a significant reduction in price. Briefly state, in the space provided below, what should she do? (5 points) She should defer the decision to the appropriate engineer within the company designated to assist in such matters. Clearly, this should be an engineering decision. If the substitute material will meet the need without any quality, safety, or marketing problems, and if it can be process without difficulty or modified so that it is satisfactory, the design and/or manufacturing engineers should provide approval. If there are disadvantages in the substitute, they need to be traded off against the lower cost (and possibly quicker delivery) advantages of the substitute with long term as well as short term consequences considered. 16. True False (circle one): Experience can be transferred between products provided there are not too many changes between successive products. (2 points) 17. True False (circle one): Experience curves provide an indication of cost changes and should be used when formulating pricing strategies. (2 points) 18. True False (circle one): In a just in time (JIT) system, stock is measured in terms of hours of production rather than in days or months, but supplier requirements tend to be similar to those in other systems. (2 points) 19. Environmental factors that must be considered in marketing to meet customer needs (circle one): (4 points) (a) Political and Ecology (b) Legal and Ethical (c) Engineer Motivation (d) Social and Cultural (e) All of the above (f) (a), (b) and (d) (g) (a), (c) and (d) 20. Information derived from marketing data generally falls into the following broad categories (circle one): (4 points) Page 5 of 5
(a) Product-related information (b) Environmental factors and changes information (c) Distribution system information (d) Customer-related information (e) Market-related information (f) All of the above (g) (a), (b), (d) and (e) (h) (a), (c), (d) and (e) 21. True False (circle one): A disadvantage of personal interviews is that replies may be biased depending on the tone of the questions asked and the bias of the interviewer. (2 points) 22. True False (circle one): Examples of specialty goods include microwave ovens and cameras. (2 points) 23. True False (circle one): Industrial goods are classified in a manner similar to consumer goods. (2 points) 24. True False (circle one): It is important that Marketing personnel rely heavily on the design engineers when deciding how to market a company s products. (2 points) 25. True False (circle one): Manufacturing Operations should have an internal focus and concentrate largely on activities such as cost cutting. (2 points) 26. True False (circle one): Flexible Manufacturing Systems are best used when the production volumes are relatively large and the number of parts not too high. (2 points) 27. True False (circle one): The primary reason for implementing a Total Quality Management system is to maximize profits. (2 points) 28. True False (circle one): Management should ask for Information Technology systems to be developed that enable them to control the way their business has historically worked. (2 points) 29. True False (circle one): An integrated Information Technology system is called for where the various functions within the organization share a common database of information and links with customers and suppliers do not exist or are not effective. (2 points) Page 6 of 6