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    Superior Outboard Motors: How long are the firm's operating and cash cycles? Using a suitable diagram show the breakdown of the firm's operating cycle into its relevant components.

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    3. How long are the firm's operating and cash cycles? Using a
    suitable diagram show the breakdown of the firm's operating
    cycle into its relevant components. What do your findings

    "We have done it again," said George Brash, the president and
    chief executive officer of Superior Outboard Motors, to his group of
    senior managers at their January meeting. "Our sales for this past year are
    up over 8% compared to the previous year, but our net profit margin and
    earnings per share are down! The shareholders are understandably upset
    and are demanding answers. It won't be long before the analysts change
    their recommendations. We better come up with some explanations and
    strategies to rectify the problem."

    Superior Outboard Motors, headquartered in Tampa, Florida, had
    manufacturing facilities in Blaine, Washington and Elkhart, Indiana. It
    specialized in the manufacture of outboard motors of various capacities,
    for small to medium sized boats. The average selling price of its motors
    was $4000 and the cost of production was $2800 per unit. The company
    had been in business for over 10 years and was well respected in the

    In particular, analysts had rated its after-sales service, consumer
    relations, and treatment of employees pretty high in comparison with its
    competitors. The company's stock (SOMI), which traded in the over the
    counter market, had appreciated significantly up until the first quarter of
    the current year. After that, however, the company had reported a drop in
    EPS for three quarters in a row causing the stock price to go down and
    the shareholders to make frantic calls to the consumer relations office.

    "I think I know what the problem is, George," said Matt Snow,
    the vice-president of finance. "I have taken a look at our financial
    statements (see Tables 1 and 2) and inventory figures for last year (see
    Table 3). While most of the expenses seem to be reasonable, I strongly
    believe that the policy of level monthly production, which was
    implemented at the start of the year, is the main culprit. Ours is a
    seasonal business with the peak season being during the months of MayAugust.
    Yet, we seem to be maintaining a level production rate of 600
    motors per month. As a result, our inventory builds up significantly
    during the lean months and sits there tying up our capital. With interest
    rates as high as they have been on our short-term borrowing (prime rate
    plus 3%, i. e. 9% plus 3%), the interest charges have been killing our

    "As you can see in this cash budget that I have prepared (Table
    4), our short-term debt varied between $2.09 million and $7.09 million
    during the first six months of the year. We ended the year with no shortterm
    debt, but ended up paying almost $290, 000 in interest expenses for
    the year. That's money that was spent primarily to finance inventory,
    which I might add, sat around for a few months. I recommend that we
    drop the level production policy and align our monthly production output
    with the forecasted sales for the month. I haven't worked out all the
    numbers yet, but I am quite sure that we will be able to boost our
    earnings quite a bit by making that change."

    "Wait a minute," said Mike Cooper, the production manager,
    from the other side of the room. "Have you considered the effect of that
    change on our workforce and employee morale? We will have to lay off
    people during lean times and scramble to hire more workers during peak
    production periods. That will have a negative effect on our operating
    efficiency and will result in some additional costs for training and
    orientation. My staff and I are in contact with these folks on a daily
    basis. I would hate to have to tell some of these 'nice' folks that they
    were being laid off for a few months, especially when our annual sales
    have been going up. There's got to be a better way!"

    "Gentlemen," said George Brash, sensing that that the arguments
    were getting rather heated. "Let's not jump to any conclusions here. I
    think you both have expressed valid points. On the one hand, we can't
    lose sight of the fact that we value our employees and must continue
    caring for them. Yet on the other, we have a responsibility to our
    shareholders. We cannot let our earnings and stock price keep on
    dropping, especially considering the fact that our sales have been going
    up on a consistent basis. As you all know, the market can be merciless,
    once the analysts change their tone. Matt, why don't you do the necessary
    number crunching and present the results at our next meeting. Let's
    analyze all aspects of our working capital management policies and try
    and come up with the best possible alternative. I think this experience
    clearly proves that in our business, as in most businesses, Timing is

    Table 1

    Superior Outboard Motors
    Income Statement

    Sales $ 28,800,000
    Cost of Goods Sold 20,160,000
    Gross Profit 8,640,000
    Overheads 4,809,600
    Depreciation 1,000,000
    Earnings before Interest & taxes 2,830,400
    Interest 1,500,000
    Earnings before taxes 1,330,400
    Taxes 466,400
    Net Income 864,000

    Table 2
    Balance Sheet

    Cash 918,280 Accounts Payable 1,680,000
    Accounts Receivable 129,600 Short-term Debt -
    Inventory 4,060,000

    Total Current Assets 5,107,880 Total Current Liabilities 1,680,000

    LTD 10,820,000

    Net Fixed Assets 13,152, 120 Total Liabilities 12,500,000

    Equity (1 million shares) 5,760,000

    Total Assets 18,260,000 LiabilitieOwners Equity 18,260,000

    Table 3
    Monthly Sales (units), Production Output (units), and Inventory Values
    Beg. Inv. Production Sales End. Inv Value @ 2800 Ea

    January 1450 600 0 2050 5,740,000
    February 2050 600 0 2650 7,420,000
    March 2650 600 200 3050 8,540,000
    April 3050 600 600 3050 8,540,000
    May 3050 600 1200 2450 6,860,000
    June 2450 600 1500 1550 4,340,000
    July 1550 600 1640 510 1,428,000
    August 510 600 1000 110 308,000
    Sept 110 600 700 10 28,000
    Oct 10 600 200 410 1,148,000
    Nov 410 600 106 904 2,531,200
    Dec 904 600 54 1450 4,060,000

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