Switch to level production
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The manager of Crafts needs to have information about how switching to level production will affect the company's profits and loan need.
Assumptions for pro formals and the cash budget.
Switching to level production will not affect Sales, Accounts Receivables, Long-term Debt, or Net Plant and Equipment. You can take those numbers from the pro forma statements given in the case. Use information in the case for COGS (65.1% of Sales), Tax Rate (34%) and interest expense and income (annual rates adjusted for monthly periods).
The lower COGS represents the savings on labor costs. The additional storage and handling costs associated with level production of $115,000 can be spread evenly over the year and added to the $200,000 per month of operating expense.
Assume the company makes an $88,000 tax payment in March, and tax payments based on the 1993 tax expense of $139,000 in four installments (e.g., 35, 35, 35, and 34 thousand) in April, June, September and December. These payments will reduce Accrued Taxes on the pro forma balance sheet.
Long-term Debt payments are $25,000 in June and December.
Inventory is a little tricky. Under level production it will grow substantially during the early part of the year. For any month Ending Inventory is Beginning Inventory plus Production less COGS of Sales in that month.
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The solution explains how to determine the impact on profits of a switch to level production
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