Gale Force Surfing Case 5
Working Capital—Level vs. Seasonal Production
Purpose: The case forces the student to view the impact of level versus seasonal production on inventory levels, bank loan requirements, and
profitability. It also considers the efficiencies (or inefficiencies) covered by the different production plans. The computations in the case are
parallel to Table 6-1 through Table 6-5 in the text, with the only difference being that seasonal production rather than level production is being
utilized. The case allows the student to properly track the movement of cash flow through the production process.
Relation to Text: The case should follow Chapter 6.
Complexity: The case involves numerous computations and may require 2 hours.
Solutions
1. New Tables 1 through 5, with Tim’s suggestion implemented, are shown in the following pages. Observe that the inventory level is now
constant at 400 units or $800,000 a month because all units produced are sold. As a side point, note that there may be no apparent need now to
Though not required, you may wish to refer to the old and new Table 4 to make a special point. Note that Tim’s suggestion causes inventory
2. New Table 5 shows the new cumulative loan balances and the interest expenses incurred each month. Under the old system (level production),
3. The first step is to compute total sales. Using the second row of Table 3 (either the old or new table), the total is $14,400,000. With an added
GALE FORCE SURFING (With Tim’s suggestion implemented)
TABLE 1. SALES FORECAST (in units)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
TABLE 2. PRODUCTION SCHEDULE AND INVENTORY (seasonal production)
Beginning
Inventory
Production
this Month Sales
Ending
Inventory
Inventory
($2,000 per
unit)
October………………… 400 + 50 – 150 = 400 $800,000
November…………….. 400 75 75 400 $800,000
December…………….. 400 25 25 400 $800,000
TABLE 3. SALES FORECAST, CASH RECEIPTS AND PAYMENTS, AND CASH BUDGET
October November December January February March April
Sales Forecast
Sales (units)………………………………………………….. 150 75 25 0 0 300 500
Sales (unit price: $3,000)……………………………….. $450,000 $225,000 $75,000 $0 $0 $900,000 $1,500,000
Cash Receipts Schedule
(Note: Sept. sales assumed to be $750,000)
Cash Payments Schedule
Production in Units………………………………………… 150 75 25 0 0 300 500
Cash Budget—Required Minimum Balance is $125,000
Cash Flow…………………………………………………….. $–50,000 $–12,500 $–100,000 $–312,500 $–200,000 $ –350,000 $ –150,000
Monthly Loan or (Repayment)……………………….. $ 50,000 $ 12,500 $ 100,000 $ 312,500 $ 200,000 $ 350,000 $ 150,000
Ending Cash
TABLE 3. (Continued) SALES FORECAST, CASH RECEIPTS AND PAYMENTS, AND CASH BUDGET
May June July August September
Sales Forecast
Sales (units)…………………………………………………………………………………………. 1,000 1,000 1,000 500 250
Sales (unit price: $3,000)………………………………………………………………………. $3,000,000 $3,000,000 $3,000,000 $1,500,000 $750,000
Cash Receipts Schedule
(Note: Sept. sales assumed to be $750,000)
Cash Payments Schedule
Production in Units……………………………………………………………………………….. 1,000 1,000 1,000 500 250
Cash Budget—Required Minimum Balance is $125,000
Cash Flow……………………………………………………………………………………………. $ 50,000 $ 800,000 $ 500,000 $ 50,000 $ 425,000
Beginning Cash……………………………………………………………………………………. 125,000 125,000 125,000 300,000 350,000
Cumulative Cash Balance……………………………………………………………………… 175,000 925,000 625,000 350,000 775,000
TABLE 4. TOTAL CURRENT ASSETS, FIRST YEAR
Cash
Accounts*
Receivable Inventory
Total
Current
Assets
October………………… $125,000 + $ 225,000 + $800,000 = $1,150,000
November…………….. $125,000 $ 112,500 $800,000 $1,037,500
December…………….. $125,000 $ 37,500 $800,000 $ 962,500
January…………………. $125,000 $ 0 $800,000 $ 925,000
*Equals 50 percent of monthly sales
TABLE 5. CUMULATIVE LOAN BALANCE AND INTEREST EXPENSE
(17% per month)
October Novembe
r
Decembe
r
January February March April
Cumulative
(Prime, 8.0%, + 4.0%)
Total Interest Expense for the Year: $50,750