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Managerial Accounting Projections

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Any information not given can be made up, because it is a case study and there is wiggle room.

Prepare the financial projections for this proposed company.

1) Present a "minimum" level of sales needed to break even for a typical cafe in the first year. Use a conservative market with lower expected prices and higher expected costs. Show a market plan where the company could at least pay for itself, and not suffer losses. Include an investment and working capital for inventory that is minimally requiring about 25,000 per cafe.

2) Present a realistic level of sales. Show a return on investment. Since the investment is so small, simply show the annual sales needed to make 50,000 after taxes per cafe. Do this in two ways: A) repeat the above conservative approach with low prices and high costs. B) Show the actual, expected prices and costs.

3) Do the probabilities: Show the 50,000 profit. Careful to check your work, because some solutions seem right, but are not.

Assume that 25% probability that the conservative numbers (low prices;high costs) will occur, with 75% probability at the expected level. Income taxes for the "typical" cafe should be assumed at 40%.

Solution Preview

1. When we talk about financial projections, what we usually talk about are the income statement, cash flows and balance sheet. However, only the income statement will be presented since this is what required to able to address all the issues asked in the case.

2. Given that the instructions say "Any information not given can be made up", then the following are these assumptions:
a. Fixed costs which include overhead, salaries and wages, and rent among others amount to \$3,000 a month or \$36,000 a year
b. The initial investment is in cash and made by the owner as an equity investment rather than as a loan
c. Depreciation from furniture and fixtures in the coffee shop is 2% of sales
d. The rest of the general, selling and administrative expenses amount to 8% of sales
Notice that the expenses are percentages of sales. This is so because the higher the sales, the higher these expenses will be

3. Below summarizes the ...

Solution Summary

The following posting helps answer various questions involving financial projections for a company.

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