Managerial Finance

Chapter 4: Measuring Financial Performance

Assignment 7: Chapter 4 Problems
Instructions:
Chapter 4 examines methods ventures use to measure financial performance and monitor
their progress. You will need these Excel working papers to solve the end-of-chapter
problems 1-6.
You should first read the problems at the end of the chapter , review these working papers
to see what is required in the problems, and then refer to the text for additional
explanation of terms and calculations. Within the working papers, I have included most of
the terms and calculations you need.
Problems 2 (exemplar), 3, and 4 deal with internal operating schedules such as cost of
production schedule, cost of goods sold schedule, and inventories schedule.
Remember to review the Excel formulas in Problem 2 (exemplar) in order to understand
how the calculations are made for the operating schedules.
Problems 5 and 7 deal with operating breakeven analysis and you should understand the
difference between variable expenses and fixed expenses. The textbook explanations may
be overly complex so I encourage you to take time to understand the new concepts.
Therefore, you should review the problem description in the textbook and examine the
working papers first.
Problem 6 deals with the statement of cash flows.
Please use Excel formulas wherever possible so that I can determine which numbers you
used for your calculations. Also, please contact me with any questions before you submit
your assignment.

File: 326034159.xlsx

Page 1

Managerial Finance
Measuring Financial Performance
ment 7: Chapter 4 Problems
Instructions:

tures use to measure financial performance and monitor

ese Excel working papers to solve the end-of-chapter
problems 1-6.

at the end of the chapter , review these working papers

e problems, and then refer to the text for additional
ions. Within the working papers, I have included most of
ms and calculations you need.

deal with internal operating schedules such as cost of

of goods sold schedule, and inventories schedule.

ormulas in Problem 2 (exemplar) in order to understand

ns are made for the operating schedules.

ting breakeven analysis and you should understand the

nses and fixed expenses. The textbook explanations may
age you to take time to understand the new concepts.
e problem description in the textbook and examine the
working papers first.

als with the statement of cash flows.

ver possible so that I can determine which numbers you

please contact me with any questions before you submit
your assignment.

File: 326034159.xlsx

Page 1

Chapter 4 Problem 2: New Product Production and Inventories Schedule

EXEMPLAR
[Internal Operating Schedules] Assume you are starting a new business
involving the manufacture and sales of a new product. Raw materials
costs are $40 per product. Direct labor costs are expected to be $30 per
product. You expect to sell each product for $110.
In month 1, you plan to produce 100 products and expect to sell 90
products.
In month 2, you plan to produce 110 products and expect to sell 115
products.
You should prepare the following schedules for month 1 and month 2:
cost of production, cost of goods sold, and inventories.

Cost of Production Schedule

Cost Per
Unit
Production (units)
Production costs:
Raw materials
Direct labor
Total costs

$ 40.00
30.00
$ 70.00

Month 1
100
$
$

4,000
3,000
7,000

Month 2
110
$
$

4,400
3,300
7,700

Cost of Goods Sold Schedule

Month 1
Month 2
Sales (units)
90
115
Costs @ $70.00 per unit
$
6,300 $
8,050
Inventories Schedule
Month 1
Beginning finished goods
$
Production:
Raw Materials
$
4,000
Direct Labor
3,000
Additions (from production)
$
7,000
Total (beginning + additions)
$
7,000
Less: Cost of goods sold
6,300
Ending finished goods
$
700

File: 326034159.xlsx

Month 2
$
700
$
$
$
$

4,400
3,300
7,700
8,400
8,050
350

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Chapter 4 Problem 3: New Electronic Product Production and Inventories Schedule

[Internal Operating Schedules] Assume you have developed and texted a prototype electronic product
and are about to start your new business. You purchase preprogrammed computer chips at $70 per
unit. Other Component costs include plastic casings at $15 per unit and assembly hardware at $5 per
unit. Direct labor costs are $15 per hour and three units can be produced per hour. The plan is to
produce 500 product units per month in January, February, and March (1st Q). Sales are expected to be
200 units in January, 400 units in February, and 800 units in March.
A.

Sales Revenue
Calculate the dollar amount of sales revenue expected in Februrary and March and for the total first
quarter.
Exemplar
January
200
$
142.50
$
28,500

Sales (units)
Selling Price-a)
Total Sales

February

1st Q
Total

March

(a- The mark-up is 50%. Therefore, Selling price per unit = Total costs X 1.5
You must first calculate the total costs (See part B below).
B.

Cost of Production Schedule

Prepare a cost of production schedule for February and March using January as an example.

Exemplar
Cost Per
Unit
Production (units)
Production costs:
Computer chips
Plastic casings
Assembly hardware
Direct labor-b)
Total costs

$ 70.00
15.00
5.00
5.00
$ 95.00

January
500
$

February

35,000
7,500
2,500
2,500
47,500 $

March

(b- Although direct labor per hour is $15.00, three units can be produced per hour.
You should calculate the cost per unit of direct labor.
C.

1. Prepare a cost of goods sold schedule for February and March and for the total 1st quarter.
2. Using your cost of goods sold estimates and the sales revenues expected in Part A, calculate
the gross earnings for February and March and for the total first quarter.
Use January as an example.
C1. Cost of Goods Sold Schedule

Sales (units)
Cost per unit
Cost of Goods Sold

Exemplar
January
200
$
95.00
$
19,000

February

March

1st Q
Total

February

March

1st Q
Total

C2. Gross Earnings Estimate

Sales (dollars)
Less: Cost of goods sold
Gross earnings
D.

Exemplar
January
$
28,500
19,000
$
9,500

Inventories Schedule
Prepare an inventories schedule for February and March (using January as an example). Remember that
the ending finished goods of one month is the beginning finished goods for the next month.

Beginning finished goods

Production:
Materials-c)
Labor
Additions (from production)
Total (beginning + additions)
Less: Cost of goods sold
Ending finished goods

Exemplar
January
$
$
$
$
$

February

March

45,000
2,500
47,500
47,500
19,000
28,500

(c- Total materials cost is the sum of computer chips, plastic casings,
and assembly hardware costs.

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Chapter 4 Problem 4: New Electronic Product Production and Inventories Schedule, Continued
[Internal Operating Schedules] This problem is a continuation of Problem 3. Assume you ramp up
production to 1,000 units per monthy in April, May, and June. Sales are expected to be 800 units
in April and 1,100 units in both May and June. Repeat the calculations requested in Problem 3 for
the second quarter of the year (April, May, and June).

A.

Sales Revenue
April

May

June

2nd Q
Total

Sales (units)
Selling Price-a)
Total Sales
(a- The mark-up is 50%. Therefore, Selling price per unit = Total costs X 1.5
You must first calculate the total costs (See part B below).
B.

Cost of Production Schedule

Cost Per
Unit

April

May

June

Production (units)
Production costs:
Computer chips
Plastic casings
Assembly hardware
Direct labor-b)
Total costs
(b- Although direct labor per hour is $15.00, three units can be produced per hour.
You should calculate the cost per unit of direct labor.
C.

1. Cost of Goods Sold Schedule

April

May

June

2nd Q
Total

April

May

June

2nd Q
Total

April

May

June

Sales (units)
Costs @ $ ? per unit
Cost of Goods Sold
2. Gross Earnings Estimate

Sales (dollars)
Less: Cost of goods sold
Gross earnings
D.

Inventories Schedule

Beginning finished goods

Production:
Materials-c)
Labor
Additions (from production)
Total (beginning + additions)
Less: Cost of goods sold
Ending finished goods
(c- Total materials cost is the sum of computer chips, plastic casings,
and assembly hardware costs.

File: 326034159.xlsx

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Chapter 4 Problem 5: SubRay Corporation Operating Breakeven Analyses

[Survival Revenues Breakeven] During the first quarter of operations, the SubRay
Corporation produced the following income statement results
SubRay Corporation
Income Statement
For the Period Ended June 30, 2009

Net Sales
Less Cost of Goods Sold (CGS)
Gross Profit
Less Less General & Administrative
Less Marketing Expenses
Less Depreciation
Earnings Before Interest & Taxes (EBIT)
Less Interest Expense
Earnings before Taxes (EBT)
Income Taxes
Net Earnings/(Loss)

$
$

$
$
$

FY 2011
300,000
180,000
120,000
60,000
60,000
20,000
(20,000)
10,000
(30,000)
0
(30,000)

% Rev
Comments
100.0%
60.0% Variable cost revenue ratio (VCRR) = CGS/Revenue
40.0%
20.0% Considered cash fixed cost (CFC)
20.0% Considered cash fixed cost (CFC)
6.7%
-6.7%
3.3% Considered cash fixed cost (CFC)
-10.0%
0.0%
-10.0%

Cost of goods sold are expected to vary with sales and be a constant percentage
of sales. The general and administrative employees have been hired and are
expected to remain a fixed cost. Marketing expenses are also expected to remain
fixed because the current sales staff members are expected to remain on fixed
salaries and no new hires are planned. The effective tax rate is expected to be
30% for a profitable firm.

A. Calculate the survival or EBDAT breakeven amount

EBDAT = Earnings before depreciation, amortization,

and Taxes
CFC = Gen & Admin + Marketing + Interest Expenses

Survival Revenue (SR)= [CFC/(1-VCRR)]

Survival Revenue (SR)=
Check:
Survival Revenues (SR)
Less Cost of goods sold (60%)
= Gross profit
Less General & administrative
Less Marketing expenses
Less Interest
= EBDAT

Amount

-a)

(a- This amount should be zero, or breakeven.

B. Calculate the EBDAT Breakeven Points in Number of Units (Assume the selling price is $50 per unit.)
Note: Number of Units = Survival revenues (SR) for a zero EBDAT divided by Selling Price per Unit ($50.00)
Number of Units Sold =

File: 326034159.xlsx

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Chapter 4 Problem 6: Castillo Products Company

[Statement of Cash Flows] Cindy and Robert Castillo founded the Castillo Products Company in 2008. The Company
manufactures components for personal decision assistant products and for other handheld electronic products. Year
2009 proved to be a text of the Castillo Products Company's ability to survive. However, sales increased rapidly in
2010, and the firm reported a net income after taxes of $75,000. Depreciate expenses were $40,000 in 2010.
Following are the Castillo Products Company's balance sheets for 2009 and 2010.
Castillo Products Company
Comparative Balance Sheet
At June 30, 2009 and June 30, 2010

Cash
Accounts Receivable
Inventories
Total Current Assets
Gross Fixed Assets
Less Accumulated Depreciation
Net Fixed Assets
Total Assets
Accounts Payable
Accruals
Bank Loan
Total Current Liabilities
Long-term Debt
Common Stock
Paid-in Capital
Retained Earnings
Total Liabilities & Equity

Increase/
2009
2010
(Decrease)
$
50,000 $
20,000 $
(30,000)
200,000
280,000
80,000
400,000
500,000
100,000
650,000
800,000
150,000
450,000
540,000
90,000
(100,000)
(140,000)
(40,000)
350,000
400,000
50,000
$ 1,000,000 $ 1,200,000 $
200,000
$

130,000 $
160,000
50,000
70,000
90,000
100,000
270,000
330,000
300,000
400,000
150,000
150,000
200,000
200,000
80,000
120,000
$ 1,000,000 $ 1,200,000 $

Note:
Negative numbers are
displayed within
parenthesis.

30,000
20,000
10,000
60,000
100,000
0
0
40,000
200,000

Prepare a formal statement of cash flows for 2010 (using the format below) and identify the major cash inflows and
outflows that were identified by the Castillo Products Company.

Problem 6
Castillo Products Company
Statement of Cash Flows
For the Period Ended June 20, 2008
Cash Flow from Operating Activities
Net Income
Depreciation
(Increase)/Decrease in Accounts Receivable
(Increase)/Decrease in Inventories
Increase/(Decrease) in Accounts Payable
Increase/(Decrease in Accrued Liabilities
Net from Operating Activities

Cash Flow from Investing Activities

(Increase)/Decrease in Gross Fixed Assets
Net from Investing Activities

Cash Flow from Financing Activities

Increase/(Decrease) in Bank Loan
Increase/(Decrease) in Long Term Debt
Cash Dividends Paid
Net from Financing Activities

Total Net Cash Increase/(Decrease)

Check:
Cash at Beginning of Period
Cash at End of Period
Total Net Cash Increase/(Decrease)

$
$
$

File: 326034159.xlsx

2010

Comments
Net income from problem statement
Add back depreciation (non cash) expense

Subtract cash dividends paid

50,000
20,000
(30,000)

CF Operating + CF Investing + CF Financing

The cash at the end of 2007 ($50,000) less
the net cash increase or decrease from
the cash flow statement should equal
the cash at the end of 2008 ($20,000).
Page 6

Chapter 4 Problem 7: Castillo Products Company

Castillo Products Company
Comparative Income Statement
For FY2007 and FY2008
[Variable Expenses and Survival Revenues Breakeven] The Castillo Products
Company described in Problem 6 has a very difficult operating year in 2009,
resulting in a net loss of $65,000 on sales of $900,000. In 2010, sales jumped to
$1,500,000, and a net profit after taxes was earned. The firms income statements
are shown below.

A.

Calculate each item on the 2010 income statement as a percent of Net Sales.
Exemplar
2009
% Rev
2010
% Rev
Net Sales
$
900,000
100.0% $
1,500,000
Cost of Goods Sold
540,000
60.0%
900,000
Gross Profit
$
360,000
40.0% $
600,000
Marketing
90,000
10.0%
150,000
General and Administrative
250,000
27.8%
250,000
Depreciation
40,000
4.4%
40,000
EBIT
(20,000)
-2.2%
160,000
Interest
45,000
5.0%
60,000
Earnings Before Taxes
$
(65,000)
-7.2% $
100,000
Income Taxes -a)
0
0.0%
25,000
Net Income/(Loss)
$
(65,000)
-7.2% $
75,000
(a- 2009 income tax includes tax loss carry forward from 2008
B.

Specify variable and fixed expenses using information in A. (Completed below.)

Variable expenses: Cost of Goods Sold (CGS) and Marketing Expenses (60% + 10% = 70%)
Fixed expenses: General & Administrative
Cash Fixed Costs (CFC): General & Admin and Interest Expense

B.

EXEMPLAR: Calculate 2009 EBDAT breakeven (Survival Revenues) with interest at $45,000.
Proof:
SR = [CFC/(1-VCRR)]
Survival Revenue
Less Variable Costs
CFC =
250,000
+
45,000
Less Cash Fixed Costs
VCRR =
70% (Rate of CGS + Mktg)
= EBDAT Breakeven
SR = $

C.

983,333
688,333
295,000
-

% Rev
100.0%
70.0%
30.0%
0.0%

983,333

Calculate 2010 EBDAT breakeven (Survival Revenues) with interest at $60,000.

SR = [CFC/(1-VCRR)]
CFC =
VCRR =
SR = $

File: 326034159.xlsx

+
(Rate of CGS + Mktg)

Proof:
Survival Revenue
Less Variable Costs
Less Cash Fixed Costs
= EBDAT Breakeven

% Rev

Page 7