Reference no: EM13195280

Southface Sportswear Corporation

Balance Sheet - December 31, 2012

Assets		Liabilities and Stockholder's Equity
Cash	$       70,000	Accounts Payable	$    3,080,000
Marketable Securities	112,000	Accrued Expenses	210,000
Accounts Receivable	4,000,000	Notes Payable (Due 02/15/13)	560,000
Inventory	1,400,000	Bonds (10%)	3,300,000
Gross Plant and Equipment	8,400,000	Common Stock (2,380,000 Shares, par value $1.00)	2,380,000
Accumulated Depreciation	2,800,000	Retained Earnings	1,652,000
Total Assets	$11,182,000	Total Liabilities and Stockholder's Equity	$  11,182,000

Southface Sportswear Corporation

Income Statement - for the Period January 1 - December 31, 2012

Sales (All credit sales)	$9,800,000
Fixed Costs1	2,940,000
Variable Costs (0.60)	5,880,000
Earnings Before Interest and Taxes	980,000
Less:  Interest	350,000
Earnings Before Taxes	$  630,000
Less:  Taxes @ 36%	226,800
Earnings After Taxes	403,200
Dividends (40% payout)	161,280
Increased Retained Earnings	$  241,920

Fixed costs include both lease expenses of $280,000 and depreciation of $650,000

The table below shows selected ratios for the firms in this industry.

Profit Margin	6.10%
Return on Equity	8.90%
Return on Assets	6.50%
Inventory Turnover	5.00X
Receivables Turnover	4.90X
Fixed Asset Turnover	2.10X
Total Asset Turnover	1.06X
Debt to Total Assets	28%
Current Ratio	1.50X
Quick Ratio	1.10X
Times Interest Earned	4.25X
Fixed Charge Coverage	3.00X

Instructions:

a) Compute the overall break-even point and the cash break-even point (in dollars not in units).Then, compute the DOL, DFL and DCL using the simplified formulas provided for you in the chapter and reiterated in the notes.

b) The company is anticipating a 20% increase in sales for 2013 and is trying to figure out if it will need additional external financing to support this increase in sales. Compute the RNF (required new funds) assuming that the company is operating at only about 70% of its current production capacity.  As explained in the text, current notes payable and bonds do not "spontaneously" increase with increases in sales and they should not be part of the L/S component in the RNF calculation.

c) Assume now, that Southface were able to bring some of its particularly weak ratios in line with the industry averages (the profit margin and the accounts receivable turnover ratios).  What would the RNF be if the profit margin and receivables turnover ratios were the same as those for the industry.  What would the accounts receivable balance be?  Use these figures in your new RNF calculations and discuss how the change has an impact on the RNF.