Edward Rogers is a notary public with his business located in Tofino, BC. Since he recently separated from his wife, they are discussing how they will split their assets once divorce procedures complete. On that note, Edward’s lawyer has asked for a balance sheet for Edward’s business to help value it. Edward has asked you to prepare the balance sheet.
CASE 1
Edward Rogers is a notary public with his business located in Tofino, BC. Since he recently separated from his wife, they are discussing how they will split their assets once divorce procedures complete. On that note, Edward’s lawyer has asked for a balance sheet for Edward’s business to help value it. Edward has asked you to prepare the balance sheet. You gather the following information (see below).
- Edward purchased all his equipment eight years ago when he started his business. The total cost of all the equipment was $100,000. He expects to replace all the equipment in four years.
- He purchased furniture and decorations for his office four years ago for $22,000. He expects the furniture and decorations to last for about ten years.
- Clients owe Edward $19,000.
- Edward owes suppliers $12,000 for goods and services he purchased for his business.
- The business has $4,750 in its bank account.
- Edward owes his staff $2,500. This amount will be paid on the next payday, in two weeks.
- Edward has a bank loan outstanding for $10,000.
- Edward keeps supplies he needs in his business. The cost of the supplies he currently has on hand is $750.
Required:
- Use the information provided to prepare a balance sheet for Edward’s business. Provide an explanation for why you classified each item as you did (asset, liability, equity). The difference between assets and liabilities will give you Edward’s equity.
- As a judge in this case, how would you use the balance sheet in deciding how to value Edward’s business?
- What additional information would you as judge might want before deciding how to value his business?
CASE 2
WeLoveBabies Company sells a baby food maker for $30 per unit. Variable costs are $15 per unit, and fixed costs total $162,000 annually.
Required:
Answer the following independent questions:
- What is the product’s CM ratio?
- Use the CM ratio to determine the break-even point in sales dollars.
- The company estimates that sales will increase by $51,000 during the coming year due to increased demand. By how much should operating income increase?
4-a. Refer to the original data. Assume that the company sold 24,000 units last year. The sales manager is convinced that a 11% reduction in the selling price, combined with a $31,000 increase in advertising expenditures, would cause annual sales in units to increase by 25%. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made.
4-b. Would you recommend that the company do as the sales manager suggests?
- Refer to the original data. Assume again that the company sold 24,000 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $3 per unit. He thinks that this move, combined with some increase in advertising, would increase annual unit sales by 50%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.
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