Reference no: EM13538462

Calcor Company has been a wholesale distributor of automobile parts for domestic automakers for 20 years. Calcor has suffered through the recent slump in the domestic auto industry, and its performance has not rebounded to the levels of the industry as a whole.
Calcor's single-step income statement for the year ended November 30, 2009, follows:

CALCOR COMPANY

Income Statement

For the Year Ended November 30, 2009 (thousands omitted)
Net sales ...........................................................................................$8,400
Expenses:
Cost of goods sold .................................................................................6,300
Selling expense .......................................................................................780
Administrative expense .............................................................................900
Interest expense ......................................................................................140
Total .................................................................................................8,120
Income before income taxes ........................................................................280
Income taxes ..........................................................................................112
Net income ..........................................................................................$ 168

Calcor's return on sales before interest and taxes was 5% in fiscal 2009 compared with the industry average of 9%. Calcor's turnover of average assets of four times per year and return on average assets before interest and taxes of 20% are both well below the industry average.

Joe Kuhn, president of Calcor, wishes to improve these ratios and raise them nearer to the industry averages. He established the following goals for Calcor Company for fiscal 2010:

Return on sales before interest and taxes ..........................8%

Turnover of average assets ..........................................5 times per year

Return on average assets before interest and taxes ...............30%

For fiscal 2010, Kuhn and the rest of Calcor's management team are considering the following actions, which they expect will improve profitability and result in a 5% increase in unit sales:

1. Increase selling prices 10%.

2. Increase advertising by $420,000 and hold all other selling and administrative expenses at fiscal 2009 levels.

3. Improve customer service by increasing average current assets (inventory and accounts receivable) by a total of $300,000, and hold all other assets at fiscal 2009 levels.

4. Finance the additional assets at an annual interest rate of 10% and hold all other interest expense at fiscal 2009 levels.

5. Improve the quality of products carried; this will increase the units of goods sold by 4%.

6. Calcor's 2010 effective income tax rate is expected to be 40%-the same as in fiscal 2009.

Required

a. Prepare a single-step pro forma income statement for Calcor Company for the year ended November 30, 2010, assuming that Calcor's planned actions would be carried out and that the 5% increase in unit sales would be realized.

b. Calculate the following ratios for Calcor Company for the 2009-2010 fiscal year and state whether Kuhn's goal would be achieved:

1. Return on sales before interest and taxes

2. Turnover of average assets

3. Return on average assets before interest and taxes

c. Would it be possible for Calcor Company to achieve the first two of Kuhn's goals without achieving his third goal of a 30% return on average assets before interest and taxes? Explain your answer.