MME 3113: Engineering Management ASSIGNMENT #3

Break-even Point Analysis and computation of financial ratios

Total Marks: 100

Problem # 1 [8+8=16] Jacks Grocery is manufacturing a store brand item that has a variable cost of $0.75 per unit and a selling price of $1.25 per unit. Fixed costs are $12,000. Current volume is 50,000 units. The Grocery can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $5,000. Variable cost would increase to $1.00, but their volume should increase to 70,000 units due to the higher quality product. (a) Should the company buy the new equipment? (b) What are the break-even points ($ and units) for the two processes? Problem # 2 [7+8+9=24] The J & J Company has three product lines of belts A, B, and C having contribution margins of $3, $2, and $1, respectively. The president foresees sales up to 200,000 units in the coming period, consisting of 20,000 units of A, 100,000 units of B, and 80,000 units of C. The companys fixed costs for the period are $255,000. (a) What is the companys break-even point in units, assuming that the given sales mix is maintained? [You may assume Pa = 1.6Va, Pb = 1.5Vb, Pc = 1.4Vc) (b) If the mix is maintained, what is the total contribution margin when 200,000 units are sold? What is the operating income? (c) What would be the operating income become if 20,000 units of A, 80,000 units of B, and 100,000 units of C were sold? What is the new break-even point in units if these relationships persist in the next period?

Problem #3 [8+4+5=17] Consider the balance sheet entries in Table 1 for Iron Eagle Corporation. (a) Compute the firms (i) Current assets (ii) Current liabilities (iii) Working capital, (iv)Shareholders equity (b) If the firm had a net income of $550,000 after taxes, what is the earnings per share. (c) When the firm issued its common stock, what was the market price of the share?

Table 1. Balance Sheet Statement as of December 31,2009 Assets Cash Marketable securities Accounts receivable Inventories Prepaid taxes and insurance Manufacturing plant at cost Less accumulated depreciation Net fixed assets Goodwill Liabilities and Shareholders Equity Notes payable Accounts payable Income taxes payable Long-term mortgage bonds Preferred stock, 6%, $110 par value (1,000 shares) Common stock, $16 par value (10,000 shares) Capital surplus Retained earnings $160,000 210,000 160, 000 60,000 40,000 $620,000 100, 000 520,000 30,000

60,000 110,000 90,000 410,000 110, 000 160,000 160,000 80,000

Problem # 4 [6+6+6+4+3=25] The data in Table 2 are available for two companies, A and B, all stated in millions. (a) Calculate each companys return on equity (ROE) and return on total assets (ROA). (b) Why is company Bs ROE so much higher than company As? Does this mean that company B is a better company? Why or why not? (c) If companies A and B were combined (merged), what would be the impact on the results on ROE? Under what conditions would such a combination make sense? (d) What is the net income during the project period? (e) Compute the net cash flow from the project during the first year.

Table 2 Data available for the two companies Description Earnings before interest and taxes Interest expenses Earnings before tax Taxes at 40 % Earnings after tax (net income) Debt Equity Company A $300 20 280 112 168 $200 800 Company B $560 160 400 160 240 $1,600 400

Problem #5[1x12 =18] Table 3 summarizes the financial conditions for Apple Computer Corporation. The closing stock price for Apple was $128.24 on September 26, 2008. The average number of outstanding shares was 892.11 million. On the basis of the financial data presented, compute the various financial ratios and make an informed analysis of Apples financial health. (a) Debt ratio (b) Times-interest-earned ratio (c) Current ratio (d) Quick (acid-test) ratio (e) Inventory turnover ratio (f) Days-sales-outstanding (g) Total-assets-turnover ratio (h) Profit margin on sales (i) Return on total assets (with a rax rate of 40%) (j) Return on common equity (k) Price/earnings ratio (l) Book value per share.

Table 3 Financial Statements for Apple Computer

All numbers in thousands Period Ending BALANCE SHEET Assets Current Assets Cash and Cash Equivalents Short-Term Investment Net Receivables Inventory Other Current Assets Total Current Assets 11,875,000 12,615,000 6,151,000 509,000 3,540,000 34,690,000 9,352,000 6,034,000 4,811,000 346,000 1,413,000 21,956,000 6,392,000 3,718,000 3,452,000 270,000 677,000 14,509,000 27-Sep-08 29-Sep-07 30-Sep-06

Long Term Investment Property Plant and Equipment Goodwill Intangible Assets Accumulated Amortization Other Assets Deferred Long-term Asset Charge Total Assets Liabilities Current Liabilities Accounts Payable Short/Current Long-Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt Other Liabilities Minority Interest Negative Goodwill Total Liabilities Stockholders Equity Preferred Stock Common stock Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Net Tangible Assets Continued -

2,455,000 207,000 352,000 641,000 1,227,000 39,572,000 1,832,000 38, 000 382,000 1,051,000 88,000 25,347,000

1,281,000 38, 000 160,000 1,217,000 17,205,000

8,558,000 5,534,000 14,092,000 746,000 18,542,000 7,177,000 13,845,000 -

6,230,000 3,069,000 9,299,000 67,000 1,449,000 10,815,000

6,471,000 6,471,000 14,000 736,000 7,221,000 4,355,000 5,607,000 22,000 9,984,000 $9,786,000

Deferred Long-term Liability Charge 3,704,000

5,368,000 9,101,000 63,000 14,532,000 $14,112,000

8,000 21,030,000 $20,471,000

All numbers in thousands Period Ending INCOME STATEMENT Total Revenue Cost of Revenue Gross Profit Operating Expenses Research Development Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest and Tax Interest Expense Income Before Tax Income Tax Expense Minority Interest Net Income Net Income To Common Shares
Note:

27-Sep-08

29-Sep-07

30-Sep-06

32,479,000 21,334,000

24,006,000 15,852,000

19,315,000 13,717,000

1,109,000

782,000 2,963,000

3,718,000 2,433,000

Selling General and Administrative 3,761,000

620,000 6,895,000 6,895,000 2,061,000 4,834,000 4,834,000

599,000 5,008,000 5,008,000 1,512,000 3,496,000 3,496,000 3,496,000

365,000 2,818,000 2,818,000 829,000 1,989,000 1,989,000 1,989,000

Net Income From Continuing Ops 4,834,000 Preferred Stock And Other Adjustments

Date of Submission: 12/12/2011 (for Section 1) and 14/12/2011 (for section 2), Delay will cost @ 10% marks per day No need of submission after 5 days from the due date.

Tips for submission: o Use a cover page (will cost you 10 marks), o Write down your matric number, name, course title, assignment number etc. o Put the Due date for Submission and the Date of Submission o Try to solve the problems yourself for deeper understanding. (In case of dire need, u can seek help from your friends, but dont do it at the first time)