"Chapter 4Problems1. Eli Lilly is very excited because sales for his nursery and plant company are expected todouble from $600,000 to $1,200,000 next year. Eli notes that net assets (Assets — Liabilities) will remain at 50 percent of sales. His firm will enjoy an 8 percentreturn on total sales. He will start the year with $120,000 in the bank and is bragging aboutthe Jaguar and luxury townhouse he will buy. Does his optimistic outlook for his cashposition appear to be correct? Compute his likely cash balance or deficit for the end of theyear. Start with beginning cash and subtract the asset buildup (equal to 50 percent of thesales increase) and add in profit.4-1. Solution:Eli LillyBeginning cash $120,000– Asset buildup (300,000) (1/2 × $600,000)Profit96,000 (8% × $1,200,000)Ending cash ($84,000) DeficitNo, he will actually end up with a negative cash balance.2. In problem 1 if there had been no increase in sales and all other facts were the same, whatwould Eli’s ending cash balance be? What lesson do the examples in problems 1 and 2illustrate?4-2. Solution:Eli Lilly (continued)Beginning cash $120,000No asset buildup -----Profit 48,000 (8% × $600,000)Ending cash $168,000The lesson to be learned is that increased sales can increasethe financing requirements and reduce cash even for a profitablefirm.S4-3 3. Gibson Manufacturing Corp. expects to sell the following number of units of steel cables atthe prices indicated under three different scenarios in the economy. The probability of eachoutcome is indicated. What is the expected value of the total sales projection?Outcome Probability Units PriceA 0.20 100 $20B 0.50 180 25C 0.30 210 304-3. Solution:Gibson Manufacturing Corporation(1) (2) (3) (4) (5) (6) ExpectedTotal ValueOutcome Probability Units Price Value (2 × 5)A .20 100 $20 2,000 400B .50 180 $25 4,500 2,250C .30 210 $30 6,300 1,890Total expected value $4,5404. The Alliance Corp. expects to sell the following number of units of copper cables at theprices indicated, under three different scenarios in the economy. The probability of eachoutcome is indicated. What is the expected value of the total sales projection?Outcome Probability Units PriceA 0.30 200 $15B 0.50 320 30C 0.20 410 40S4-4 4-4. Solution:Alliance Corporation(1) (2) (3) (4) (5) (6) ExpectedTotal ValueOutcome Probability Units Price Value (25)× A .30 200 $15 $3,000 900B .50 320 $30 9,6004,800C .20 410 $40 16,4003,280Total expected value $8,9805. ER Medical Supplies had sales of 2,000 units at $160 per unit last year. The marketingmanager projects a 25 percent increase in unit volume this year with a 10 percent priceincrease. Returned merchandise will represent 5 percent of total sales. What is your netdollar sales projection for this year?4-5. Solution:ER Medical Supplies Unit volume2,000 × 1.25 ...........................................2,500 Price$160 × 1.10 ............................................$176 Total Sales ...................................................................... $ 440,000 Returns (6%) ..................................................................22,000 Net Sales ........................................................................ $ 418,000S4-5 6. Cyber Security Systems had sales of 3,000 units at $50 per unit last year. The marketingmanager projects a 20 percent increase in unit volume sales this year with a 10 percentprice increase. Returned merchandise will represent 6 percent of total sales. What is yournet dollar sales projection for this year?4-6. Solution:Cyber Security SystemsUnit volume3,000 × 1.20 .................3,600Price$50 × 1.10 ....................× $55Total Sales ............................................$198,000Returns (6%) .........................................11,880Net Sales ...............................................$186,1207. Sales for Ross Pro’s Sports Equipment are expected to be 4,800 units for the comingmonth. The company likes to maintain 10 percent of unit sales for each month in endinginventory. Beginning inventory is 300 units. How many units should the firm produce forthe coming month?4-7. Solution:Ross Pro’s Sports Equipment+ Projected sales ....................4,800 units+ Desired ending inventory ...480 (10% × 4,800)– Beginning inventory .......... 300Units to be produced ..........4,980S4-6 8. Digitex, Inc., had sales of 6,000 units in March. A 50 percent increase is expected in April.The company will maintain 5 percent of expected unit sales for April in ending inventory.Beginning inventory for April was 200 units. How many units should the company producein April?4-8. Solution:Digitex, Inc.+ Projected sales .............9,000 units (6,000 × 1.5)+ Desired ending inventory 450 units (5% × 9,000)– Beginning inventory ... 200 units Units to be produced ...9,250 units9. Hoover Electronics has beginning inventory of 22,000 units, will sell 60,000 units for thecoming month, and desires to reduce ending inventory to 30 percent of beginninginventory. How many units should Hoover produce?4-9. Solution: Hoover Electronics+ Projected sales ....................60,000 units+ Desired ending inventory ...6,600 (30% × 22,000)– Beginning inventory .......... 22,000 units Units to be produced ..........44,600 unitsS4-7 "