Corporate Finance MGMT E2700 Fall 2020 Case assignment Professor Gandevani Page 1 of 9 Sunny Corporation Fixed vs. Seasonal Monthly Production Sunny Corporation is a manufacturing company. Due to the...

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Corporate Finance MGMT E2700 Fall 2020 Case assignment Professor Gandevani Page 1 of 9 Sunny Corporation Fixed vs. Seasonal Monthly Production Sunny Corporation is a manufacturing company. Due to the nature of the business, its sales are seasonal, where there are months with high sales volume and months with low to no sales. Within the management, there are two opinions about operation on how to deal with this business model. As CEO you must evaluate which opinion will maximize shareholder wealth. The current operation in practice is championed by Paul, the director of production. Paul is maintaining a staple group of full-time employees around the year to ensure quality of products. To keep the employees productive during low volume months, Paul decides to produce a fixed amount of inventory each month. This helps to preserve employees’ product making skill with no downtime. However, to financially support production during low volume months, short term loans are used to cover cash shortage. Betty, the new director of finance, has offered an alternative mode of operation by having a seasonal production, where monthly production matches the same month’s sales volume. Betty believes having a seasonal production will greatly reduce interest expenses and will improve the company overall performance. Betty’s idea will create some changes in the work force and potential downtime. You, the CEO, is looking at Sunny’s information table 1-6 based on the current mode of operation, where the company fiscal year is from October to September. During 2019, Sunny has achieved an annual return of equity of 15% and a profit margin of 2.25%. Sunny operates in an area with no corporate income tax. You must decide which to adopt by analyzing the effect of both mode of operation and how the effect compares with industry benchmarks. (Total 100 points. All formulas used must be from the course textbook. Please submit One pdf file combining write up, revised tables and calculation on Canvas before due date. All numbers in the case are hypothetical. See the grading rubric on specific case requirements.) Required Questions 1. Tables 1 through 5 contains the financial information describing the effects of level production on inventory, cash flow, loan balances, and interest expense. Reproduce these tables if Betty’s suggestions were implemented; that is, change the Production This Month column in Table 2 from 400 each month to 100, 75, 50, and so on, to match Sales in the next column. Then recompute the remainder of Table 2, and Tables 3, 4, and 5 based on the new production numbers. Beginning inventory is still 400 units. Beginning cash is still $125,000 and that remains the minimum required balance. Corporate Finance MGMT E2700 Fall 2020 Case assignment Professor Gandevani Page 2 of 9 Sunny operates in an area where there is no corporate income tax. Be sure to present all revised tables and justify which production method is better. Support your justification with at least one ratio from each of the following categories with a total ratio of seven or more. Categories include: Profitability, Financial Leverage, Asset Utilization, Debt Utilization, and Liquidity. Must make comparison with benchmarks in table 6. (60 Points) 2. Given that Sunny Corporation is charged 12 percent annual interest (1 percent a month) on its cumulative loan balance each month (Table 5), how much would Betty’s suggestion save in interest expense in a year? Be sure to show your table and calculation. (15 Points) 3. Up until now, we have not considered any inefficiencies that have been introduced as a result of going from level to seasonal production. Assume that there is an added expense for each sales dollar of .5 percent (.005). Based on this fact and the information computed in question 2, mainly table 3 and 5, is seasonal production justified? Be sure to justify with calculation of interests saved. No need to recreate all tables or all ratios, only re-create table 3 and 5. (15 Points) Corporate Finance MGMT E2700 Fall 2020 Case assignment Professor Gandevani Page 3 of 9 Grading Rubric Excellent Good Average Unacceptable Q1 60 pts No calculation errors. All revised table 1-5 are included. 7 or more ratios from the required categories are presented. Show mastery of material by linking the justification to all tables and ratios. 55-60 pts All revised table and all ratios from all required categories are presented with a few minor calculation issues. Must support justification with explanation of ratios and tables. 46-54 pts Missing revised tables 1-5 or required 7 ratios from each required category. Justification is not supported by tables and ratios. 31-45 pts Major omission from requirement to no submission 0-30 pts Q2 15 pts Error free calculation with all steps shown. 13-15 pts Minor interest calculation with all calculation steps provided 9-12 pts Major calculation error in the interest calculation and or no calculation steps shown. 5-8 pts Major omission from requirement to no submission 0-4 pts Q3 15 pts Justify decision with interest savings. Error free calculation with all steps shown. 13-15 pts Justify decision with interest savings. Minor interest calculation with all calculation steps provided 9-12 pts Major calculation error in the interest calculation and or no calculation steps Missing justification shown. 5-8 pts Major omission from requirement to no submission 0-4 pts Structure 5 pts Error free professional presentation 5 pts A few minor grammar or presentation issues 3-4 pts Many grammar or presentation issues 1- 2 pts Unprofessional presentation 0 pts APA format 5 pts Error free APA format. Must include citation, cover page, table of content, introduction, discussion and analysis, and conclusion. 5 pts A few minor APA format errors. 4 pts Many APA errors 1-2 pts APA in text and citation format not followed. 0 pts Corporate Finance MGMT E2700 Fall 2020 Case assignment Professor Gandevani Page 4 of 9 Table 1 Sales Forecast in Units Table 1 Sales Forecast in Units 1st QTR Oct 2020 100 Nov 75 Dec 50 2nd QTR Jan 2021 0 Feb 0 Mar 250 3rd QTR Apr 550 May 900 Jun 1100 4th Qtr July 1000 Aug 550 Sep 200 Table 2 Production Schedule and Inventory (equal monthly production) Beginning Production Sales End Inventory Inventory This Inventory $2,000 Sales Month per unit in $ October 2020 400 400 100 700 $1,400,000 $ 300,000 November 700 400 75 1025 $2,050,000 $ 225,000 December 1025 400 50 1375 $2,750,000 $ 150,000 January 1375 400 0 1775 $3,550,000 $ - February 1775 400 0 2175 $4,350,000 $ - March 2175 400 250 2325 $4,650,000 $ 750,000 April 2325 400 550 2175 $4,350,000 $ 1,650,000 May 2175 400 900 1675 $3,350,000 $ 2,700,000 June 1675 400 1100 975 $1,950,000 $ 3,300,000 July 975 400 1000 375 $750,000 $ 3,000,000 August 375 400 550 225 $450,000 $ 1,650,000 Corporate Finance MGMT E2700 Fall 2020 Case assignment Professor Gandevani Page 5 of 9 September 225 400 200 425 $850,000 $ 600,000 Table 3 Sales Forecast, Cash Receipts and Payments, and Cash Budget October November December January February March Unit 2020 Price/Cost Sales Forecast Sales (units) 100 75 50 0 0 250 Sales unit price: $3,000 $300,000 $225,000 $150,000 $0 $0 $750,000 Cash Receipts Schedule Cash 50% $150,000 $112,500 $75,000 $0 $0 $375,000 From prior month’s sales* 50% $ 375,000 $150,000 $112,500 $75,000 $0 $0 Total cash receipts $525,000 $262,500 $187,500 $75,000 $0 $375,000 Cash Payments Schedule Production in units 400 400 400 400 400 400 Production costs $ 2,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00 Fixed overhead $ 200,000.00 $ 200,000.00 $ 200,000.00 $