Question BE24-9 Heartland Company鈥檚 budgeted s... [FREE SOLUTION]

Chapter 24: Question BE24-9 (page 1447)

Heartland Company鈥檚 budgeted sales and budgeted cost of goods sold for the coming year are $144,000,000 and $99,000,000, respectively. Short-term interest rates are expected to average 10%. If Heartland can increase inventory turnover from its present level of 9 times a year to a level of 12 times per year, compute its expected cost savings for the coming year.

Short Answer

Expert verified

The expected cost savings for the coming year is $275,000.

Step by step solution

Meaning of Cost of Goods Sold

The direct cost of manufacturing the goods sold by a corporation is known as the cost of goods sold (COGS). This amount directly covers the cost of materials and labor used in manufacturing the final product. When calculating COGS, indirect costs such as advertising and administrative costs are not included.

Computation of expected Cost savings for the coming year

Average inventory (current) $11,000,000

Working Notes:

$Inventory Turnover = \frac{Cost of goods sold}{Average inventory} 9 = \frac{$ 99, 000, 000}{Average inventory} Average Inventory = \frac{$ 99, 000, 000}{9} = $ 11, 000, 000$

Average inventory (new) $8,250,000

$Inventory Turnover = \frac{Cost of goods sold}{Average Inventory} 12 = \frac{$ 99, 000, 000}{Average Inventory} Average Inventory = \frac{$ 99, 000, 000}{12} = $ 8, 250, 000$

Calculation of Cost savings

$Cost saving = (Average Inventory current - Average inventory new) 脳 Average rate = ($ 11, 000, 000 - $ 8, 250, 000) 脳 10 % = $ 2, 750, 000 脳 10 % = $ 275, 000$

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RNA INC. INCOME STATEMENT FOR THE YEAR ENDED NOVEMBER 30, 2018 (IN THOUSANDS)
Sales (net)	\(30,500
Interest income	500
Total revenue	31,000
Costs and expenses
Cost of goods sold	17,600
Selling and administrative expenses	3,550
Depreciation and amortization expense	1,890
Interest expense	900
Total costs and expenses	23,940
Income before taxes	7,060
Income taxes	2,800
Net income	\) 4,260

RNA INC. BALANCE SHEET AS OF NOVEMBER 30 (IN THOUSANDS)
	2018	2017
Cash	\( 400	\) 500
Short-term investments (at cost)	300	200
Accounts receivable (net)	3,200	2,900
Inventory	6,000	5,400
Total current assets	9,900	9,000
Property, plant, & equipment (net)	7,100	7,000
Total assets	\(17,000	\)16,000
Accounts payable	\( 3,700	\) 3,400
Income taxes payable	900	800
Accrued expenses	1,700	1,400
Total current liabilities	6,300	5,600
Long-term debt	2,000	1,800
Total liabilities	8,300	7,400
Common stock (\(1 par value)	2,700	2,700
Paid-in capital in excess of par	1,000	1,000
Retained earnings	5,000	4,900
Total stockholders鈥� equity	8,700	8,600
Total liabilities and stockholders鈥� equity	\)17,000	$16,000

SELECTED FINANCIAL RATIOS
RNA INC
	2017	2016	Current Inventory Average
Current ratio	1.61	1.62	1.63
Acid-test ratio	0.64	0.63	0.68
Times interest earned	8.55	8.50	8.45
Profit margin on sales	13.2%	12.1%	13.0%
Asset turnover	1.84	1.83	1.84
Inventory turnover	3.17	3.21	3.18

	A	B	C	D	E
Sales revenue	\(40,000	\)75,000	\(580,000	\)35,000	\(55,000
Cost of goods sold	19,000	50,000	270,000	19,000	30,000
Operating expenses	10,000	40,000	235,000	12,000	18,000
Total expenses	29,000	90,000	505,000	31,000	48,000
Operating profit (loss)	\)11,000	\((15,000)	\)75,000	\(4,000	\)7,000
Identifiable assets	\(35,000	\)80,000	\(500,000	\)65,000	\(50,000

Operating Segment	Total Revenue	Operating Profit (Loss)	Identifiable Assets
W	\( 60,000	15,000	\)167,000
X	10,000	3,000	83,000
Y	23,000	(2,000)	21,000
Z	9,000	1,000	19,000
	\(102,000	\)17,000	$290,000

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Meaning of Cost of Goods Sold

Computation of expected Cost savings for the coming year

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	Toulouse Co.	Lautrec Co.
Assets
Cash	\(120,000	\) 320,000
Receivables	220,000	302,000
Inventories	570,000	518,000
Total current assets	910,000	1,140,000
Other assets	500,000	612,000
Total assets	\(1,410,000	\)1,752,000
Liabilities and Stockholders鈥� Equity
Current liabilities	\( 305,000	\) 350,000
Long-term liabilities	400,000	500,000
Capital stock and retained earnings	705,000	902,000
Total liabilities and stockholders鈥� equity	\(1,410,000	\)1,752,000
Annual sales	\(930,000	\)1,500,000
Rate of gross profit t on sales	30%	40%