"Chapter 6Problems1.Gary’s Pipe and Steel company expects sales next year to be $800,000 if the economy isstrong, $500,000 if the economy is steady, and $350,000 if the economy is weak. Garybelieves there is a 20 percent probability the economy will be strong, a 50 percentprobability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for next year?6-1. Solution:Gary’s Pipe and Steel CompanyState of ExpectedEconomy Sales Probability OutcomeStrong $800,000 .20 $160,000Steady 500,000 .50 250,000Weak 350,000 .30 105,000 Expected level of sales = $515,000S6-4 2. Nile Riverboat Co., a major boat building company highly sensitive to the economy,expects profits next year to be $2,000,000 if the economy is strong, $1,200,000 if theeconomy is steady, and minus $400,000 if the economy is weak. Mr. Nile believes there isa 30 percent probability of a strong economy, a 40 percent probability of a steady economy,and a 30 percent probability of a weak economy. What is the expected value of profits fornext year?6-2. Solution:Nile Riverboat Co.State of ExpectedEconomy Profits Probability OutcomeStrong 2,000,000 .30 $600,000Steady 1,200,000 .40 480,000Weak –400,000 .30 –120,000 Expected level of profits = $960,0003.Tobin Supplies Company expects sales next year to be $500,000. Inventory and accountsreceivable will increase $90,000 to accommodate this sales level. The company has asteady profit margin of 12 percent with a 40 percent dividend payout. How much externalfinancing will Tobin Supplies Company have to seek? Assume there is no increase inliabilities other than that which will occur with the external financing.6-3. Solution:Tobin Supplies Company$500,000 Sales.12 Profit margin60,000 Net income–24,000 Dividends (40%)$36,000 Increase in retained earnings$90,000 Increase in assets–36,000 Increase in retained earnings$54,000 External funds neededS6-5 4.Shamrock Diamonds expects sales next year to be $3,000,000. Inventory and accountsreceivable will increase $420,000 to accommodate this sales level. The company has asteady profit margin of 10 percent with a 25 percent dividend payout. How much externalfinancing will the firm have to seek?6-4. Solution:Shamrock Diamonds $3,000,000 Sales.10 Profit margin300,000 Net income75,000 Dividends (25%)$225,000 Increase in retained earnings420,000 Increase in assets–225,000 Increase in retained earnings$195,000 External funds needed5.Electric Chair and Table Co. expects sales next year to be $10,000,000. Inventory andaccounts receivable will increase by $1,400,000 and accounts payable will increase by$300,000. The company has a profit margin of 9 percent and pays out 30 percent of profitsin dividends. How much external financing will be necessary? Assume there is no increase in liabilities other than that which will occur with the externalfinancing.6-5. Solution:Electric Chair and Table Company$10,000,000 Sales .09 Profit margin 900,000 Net income 270,000 Dividends (30%) 630,000 Increase in retained earnings1,400,000 Increase in assets –200,000 Increase in accounts payable –630,000 Increase in retained earnings$ 570,000 External funds neededS6-6 6.Fashion’s Clothiers sells scarves that are very popular in the fall-winter season. Units soldare anticipated as:October ..................................................... 2,000November ................................................. 4,000December ................................................. 8,000January ..................................................... 6,000 20,000 unitsIf seasonal production is used, it is assumed that inventory buildup will directlymatch sales for each month and there will be no inventory buildup.The production manager thinks the above assumption is too optimistic and decides togo with level production to avoid being out of merchandise. He will produce the 20,000units over 4 months at a level of 5,000 per month.a. What is the ending inventory at the end of each month? Compare the units produced tothe units sold and keep a running total.b. If the inventory costs $7 per unit and will be financed at the bank at a cost of 8 percent,what is the monthly financing cost and the total for the four months?6-6. Solution:Fashion’s Clothiersa. Units Change in EndingProduced Units Sold inventory InventoryOctober 5,000 2,000 +3,000 3,000November 5,000 4,000 +1,000 4,000December 5,000 8,000 –3,000 1,000January 5,000 6,000 –1,000 0S6-7 6-6. (Continued)b.Ending Cost perInventoryInventory Unit ($7) Financing CostOctober $3,000 $21,000 $1,680November 4,000 28,000 2,240December 1,000 7,000 560January 0 0 0 $4,480S6-8 "