Clarkson Lumber Co.

Harvard Business School Case #297-028 Case Software #XLS90

Copyright 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval sys any form or by any meanselectronic, mechanical, photocopying, recording or otherwisewithout the permission of Harvard Busin

may be reproduced, stored in a retrieval system or transmitted in isewithout the permission of Harvard Business School.

Exhibit 1 Operating Expenses for Years Ending December 31, 1993-1995, and for First Quarter 1996 (thousands of dollars) 1993 Net sales Cost of Goods Sold: Beginning inventory Purchases Ending inventory Total Cost of Goods Sold Gross profit b Operating expenses Earnings before interest and taxes Interest expense Net income before income taxes Provision for income taxesc Net income $2,921 330 2,209 $2,539 337 $2,202 719 622 $97 23 $74 14 $60 1994 $3,477 337 2,729 $3,066 432 $2,634 843 717 $126 42 $84 16 $68 1995 $4,519 432 3,579 $4,011 587 $3,424 1,095 940 $155 56 $99 22 $77 1st Quarter 1996 $1,062a 587 819 $1,406 607 $799 263 244 $19 13 $6 1 $5

a b

In the first quarter of 1995, sales were $903,000 and net income was $7,000

Operating expenses include a cash salary for Mr. Clarkson of $75,000 in 1993; $80,000 in 1994; $85,000 in 1995; and $22,500 in the first quarter of 1996.
c

Clarkson Lumber was required to estimate its income tax liability for the current tax year and pay four quarterly estimated tax installments during that year. The first $50,000 of pretax profits were taxed at a 15% rate; the next $25,000 were taxed at a 25% rate; the next $25,000 were taxed at a 34% rate; and profits in excess of $100,000 but less than $335,000 were taxed at a 39% rate.

Assignment 1: Clarkson Lumber Case Name: Areeb Javaid ID: 2013-02-0334 Proforma Income Statement 1995 $ ('000s) $ 4,519 432 3,579 4,011 587 3,424 1,095 940 155 56 99 22 77 1996 $ ('000s) $ 5,500 587 4,277 (77.77% of sales) 4,864 704 4,160 (75.64% of sales) 1,340 1,150 (20.91% of sales) 190 69 93 167 49 118

Net sales Cost of goods sold: Beginning inventory Purchases Ending inventory Total cost of goods sold Gross Profit Operating expenses Earnings before interest and taxes Purchase Discountsa Interest expenseb Net income before income taxes Provision for income taxesc Net income
a b
c

$ $

$ $

Assume purchase discounts of 2% taken on all purchases. The amount has been shown separately instead of accumulating in COGS. 11% on the average outstanding balanceof 95 and projected 96.

Clarkson Lumber was required to estimate its income tax liability for the current tax year and pay four quarterly estimated tax installments during that year. The first $50,000 of pretax profits were taxed at a 15% rate; the next $25,000 were taxed at a 25% rate; the next $25,000 were taxed at a 34% rate; and profits in excess of $100,000 but less than $335,000 were taxed at a 39% rate.

Exhibit 2 dollars)

Balance Sheets at December 31, 1993-1995, and March 31, 1996 (thousands of

1993 Cash Accounts receivable, net Inventory Current assets Property, net Total Assets $43 306 337 $686 233 $919

1994 $52 411 432 $895 262 $1,157

1995 $56 606 587 $1,249 388 $1,637

1st Quarter 1996 $53 583 607 $1,243 384 $1,627

Notes payable, bank b Note payable to Holtz, current portion Notes payable, trade Accounts payable Accrued expenses c Term loan, current portion Current liabilities Term loanc Note payable, Mr. Holtzb Total Liabilities Net worth Total Liabilities and Net Worth

$0 0 0 213 42 20 $275 140 0 $415 504 $919

$60 100 0 340 45 20 $565 120 100 $785 372 $1,157

$390 100 127 376 75 20 $1,088 100 0 $1,188 449 $1,637

$399 100 123 364 67 20 $1,073 100 0 $1,173 454 $1,627

a b c

Interest is computed on the average outstanding loan balance at the rate of prime plus 2%. Interest is fixed at 11% times the outstanding balance.

Interest is fixed at 10.0% times the outstanding balance; the term loan is secured by the fixed assets and is repayable in semiannual installments of $10,000.

Assignment 1: Clarkson Lumber Case Name: Areeb Javaid ID: 2013-02-0334 Proforma Balance Sheet 1995 $ ('000s) 1996 $ ('000s) 77 655 704 1,436 442 1,878 (1.40% of sales) (11.90% of sales)

Assets
Cash Accounts receivable, net Inventory Current assets Property, net Total Assets 56 606 587 1,249 388 1,637

$ $

$ $

(8.03% of sales)

Liabilties and Equiy

Note payable to Holtz, current portion Notes payable, trade Accounts payable Accrued expenses Term loan, current portion Notes payable, bank (plug figure) Current liabilities Term loan Note payable to Mr. Holtz Total Liabilities Net worth Total Liabilities and Net Worth 100 127 376 75 20 390 1,088 100 1,188 449 1,637 117 80 20 1,014 1,231 80 1,311 567 1,878 (for 10 days of purchases) (1.46% of sales)

Assignment 1: Clarkson Lumber Case Name: Areeb Javaid ID: 2013-02-0334 Statement of Cashflows 1994 $ ('000s) Cashflow from Operating Activities Increase in A/R (105.00) Increase in Inventory (95.00) Increase in A/P 127.00 Increase in Accrued Expense 3.00 Increase in N/P -Trade Net Income/(Loss) 68.00 Net Cashflow from Operations Cashflow from Investing Activities Increase in PP&E Net Cashflow from Investments Cashflow from Financing Activities Decrease in Term Loan Increase in N/P -Bank Buyout of Holtz's Equity Change in N/P - Holtz Buyout Net Cashflow from Financing Net Change in Cash $ $ $ $ (2.00) $

1995 $ ('000s) (195.00) (155.00) 36.00 30.00 127.00 77.00 (80.00)

(29.00) (29.00) $

(126.00) (126.00)

(20.00) 60.00 (200.00) 200.00 40.00 9.00 $ $

(20.00) 330.00 (100.00) 210.00 4.00

Exhibit 3

Selected Statistics on Lumber Outlets Low-Profit Outlets

a

High-Profit Outlets

Percent of sales: Cost of goods Operating expense Cash Accounts receivable Inventory Fixed assets, net Total Assets Percent of Total Assets: Current liabilities Long-term liabilities Equity Current ratio Return on sales Return on assets Return on equity

76.9% 22.0 1.3 13.7 12.0 12.1 39.1 52.7% 34.8 12.5 1.31 (0.7%) (1.8%) (14.3%)

75.1% 20.6 1.1 12.4 11.6 9.2 34.3 29.2% 16.0 54.8 2.52 4.3% 12.2% 22.1%

Defined as the bottom 25% and as the top 25% of all contributors, based on return on sales.