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 maintain the 400
2. New Table 5 shows the new cumulative loan balances and the interest expenses incurred each month.
3. The first step is to compute total sales. Using the second row of Table 3 (either the old or new table),
GALE FORCE SURFING (With Tim’s suggestion implemented)
TABLE 1. SALES FORECAST (in units)
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
October
150
January
0
April
500
July
1,000
November
75
February
0
May
1,000
August
500
December
25
March
300
June
1,000
September
250
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
January ………………..
400
0
0
400
$800,000
February ………………
400
0
0
400
$800,000
March ………………….
400
300
300
400
$800,000
April ……………………
400
500
500
400
$800,000
May …………………….
400
1,000
1,000
400
$800,000
June …………………….
400
1,000
1,000
400
$800,000
July ……………………..
400
1,000
1,000
400
$800,000
August …………………
400
500
500
400
$800,000
September …………….
400
250
250
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
50% cash ……………………………………………………..
$225,000
$112,500
$ 37,500
$ 0
$0
$450,000
$ 750,000
50% from prior month’s sales …………………………
$375,000
$225,000
$112,500
$37,500
$0
$ 0
$ 450,000
Total Cash Receipts ………………………………………
$600,000
$337,500
$150,000
$37,500
$0
$450,000
$1,200,000
(Note: Sept. sales assumed to be $750,000)
Cash Payments Schedule
Production in Units ……………………………………….
150
75
25
0
0
300
500
Production Costs (each = $2,000) ……………………
$300,000
$150,000
$ 50,000
$ 0
$ 0
$600,000
$1,000,000
Overhead ……………………………………………………..
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$ 200,000
Dividends and Interest …………………………………..
Taxes …………………………………………………………..
$150,000
$150,000
$ 150,000
Total Cash Payments …………………………………….
$650,000
$350,000
$250,000
$350,000
$200,000
$800,000
$1,350,000
Cash Budget—Required Minimum Balance is $125,000
Cash Flow ……………………………………………………
$–50,000
$–12,500
$–100,000
$–312,500
$–200,000
$ –350,000
$ –150,000
Beginning Cash …………………………………………….
125,000
125,000
125,000
125,000
125,000
125,000
125,000
Cumulative Cash Balance ………………………………
$ 75,000
$112,500
$ 25,000
$–187,500
$ –75,000
$ –225,000
$ –25,000
Monthly Loan or (Repayment) ……………………….
$ 50,000
$ 12,500
$ 100,000
$ 312,500
$ 200,000
$ 350,000
$ 150,000
Cumulative Loan…………………………………………..
$ 50,000
$ 62,500
162,500
$ 475,000
$ 675,000
$1,025,000
$1,175,000
Ending Cash
Balance ……………………………………………………
$125,000
$125,000
$ 125,000
$ 125,000
$ 125,000
$ 125,000
$ 125,000
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
50% cash ……………………………………………………………………………………………
$1,500,000
$1,500,000
$1,500,000
$ 750,000
$ 375,000
50% from prior month’s sales ……………………………………………………………….
$ 750,000
$1,500,000
$1,500,000
$1,500,000
$ 750,000
Total Cash Receipts …………………………………………………………………………….
$2,250,000
$3,000,000
$3,000,000
$2,250,000
$1,125,000
(Note: Sept. sales assumed to be $750,000)
Cash Payments Schedule
Production in Units ……………………………………………………………………………..
1,000
1,000
1,000
500
250
Production Costs (each = $2,000) ………………………………………………………….
$2,000,000
$2,000,000
$2,000,000
$1,000,000
$500,000
Overhead ……………………………………………………………………………………………
$ 200,000
$ 200,000
$ 200,000
$ 200,000
$200,000
Dividends and Interest …………………………………………………………………………
$1,000,000
Taxes …………………………………………………………………………………………………
$ 300,000
Total Cash Payments …………………………………………………………………………..
$2,200,000
$2,200,000
$2,500,000
$2,200,000
$700,000
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
Monthly Loan or (Repayment) ……………………………………………………………..
$
(50,000)
$
(800,000)
$
(325,000)
$
0
$
0
Cumulative Loan…………………………………………………………………………………
$
1,125,000
$
325,000
$
0
$
0
$
0
Ending Cash Balance …………………………………………………………………………..
$
125,000
$
125,000
$
300,000
$
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
February ……………….
$125,000
$ 0
$800,000
$ 925,000
March …………………..
$125,000
$ 450,000
$800,000
$1,375,000
April …………………….
$125,000
$ 750,000
$800,000
$1,675,000
May ……………………..
$125,000
$1,500,000
$800,000
$2,425,000
June ……………………..
$125,000
$1,500,000
$800,000
$2,425,000
July………………………
$300,000
$1,500,000
$800,000
$2,600,000
August ………………….
$350,000
$ 750,000
$800,000
$1,900,000
September …………….
$775,000
$ 375,000
$800,000
$1,950,000
*Equals 50 percent of monthly sales
TABLE 5. CUMULATIVE LOAN BALANCE AND INTEREST EXPENSE
(17% per month)
October
November
December
January
February
March
April
Cumulative
Loan Balance …
$50,000
$62,500
$162,500
$475,000
$675,000
$1,025,000
$1,175,000
Interest
Expense at
12.00% ………….
$ 500
$ 625
$ 1,625
$ 4,750
$ 6,750
$ 10,250
$ 11,750
(Prime, 8.0%,
+ 4.0%)
May
June
July
August
September
Cumulative Loan Balance
$1,125,000
$ 325,000
$0
$0
$0
Interest Expense at 12.00%
$ 11,250
$ 3,250
$0
$0
$0
(Prime, 8.0%, + 4.0%)
Total Interest Expense for the Year: $50,750