1. What factors could Mr.

McClintock consider in deciding whether or not to adopt the level

production plan?

The main factors Mr. McClintock should consider when deciding whether or not to adopt the level
production plan comes down to the trade off between liquidity and profitability. Given the highly
seasonal nature of the industry, producing goods ahead of time has strong risks associated with it.
If management’s projections are incorrect, the company could incur significant inventory write-
downs or write offs. Additionally, the company will incur extra costs of storing the inventory that
will accumulate in the first half of the year. Further, Mr. McClintock should analyze the differences
in amount and timing of the company’s external funding needs under the level production plan,
and whether or not the financing needs can be met by the current credit line of $2 million. To
assess the impact of these factors, we prepared pro forma financial statements under level
production.

2.What savings would be involved?

The savings involved in leveling production include reductions in overtime premiums as well as a
decrease in additional labor costs. Expenses involved in this production overhaul include increased
shipping and handling expenses and an increase in interest expenses. Both of these expenses are a
result of having increased inventory levels.
 Income Statement (thousands of dollars)
1991 1992 1993 1994
Net Sales 5,213 6,167 7,967 10,000
COGS 70.00% 3,597 4,440 5,577
Gross Profit 30.00% 1,616 1,727 2,390
Operating Expenses 24.00% 1,199 1,542 1,912
Interest Expense 1.07% 68 75 85
Interest Income 0.20% 20 15 16
PBT 5.13% 369 125 409
Income Tax 1.74% 125 43 139
PAT 3.39% 244 82 270 351
 Incom
Jan Feb Mar Apr
Net Sales 120 140 160 140
COGS 84 98 112 98
Gross Profit 36 42 48 42
Operating Expenses 200 200 200 200
Interest Expense 7 4 4 4
Interest Income 2 4 5 4
PBT - 169 - 158 - 151 - 158
Income Taxes - 57 - 54 - 51 - 54
PAT - 112 - 104 - 100 - 104

Inco
Jan Feb Mar Apr
Net Sales 120 140 160 140
COGS 78 91 104 91
Gross Profit 42 49 56 49
Operating Expenses 210 210 210 210
Interest Expense 7 4 4 4
Interest Income 2 4 5 4
PBT - 173 - 161 - 153 - 161
Income Taxes - 57 - 54 - 51 - 54
PAT - 116 - 107 - 102 - 107

Balance Sheet
1993 Jan Feb Mar Apr
Cash 200 878 1,526 1,253 1,054
Accounts Receivable 2,905 1,060 260 300 300
Inventory 586 586 586 586 586
Current Assets 3,691 2,524 2,372 2,139 1,940
Net Plant and Equipment 1,176 1,176 1,176 1,176 1,176
Total Assets 4,867 3,700 3,548 3,315 3,116
Accounts Payable 282 36 42 48 42
Notes Payable 752 - - - -
Accrued Taxes 88 31 - 23 - 162 - 251
Long Term Debt, Current Portion 50 50 50 50 50
Current Liabilities 1,172 117 69 - 64 - 159
Long Term Debt 400 400 400 400 400
Shareholders' Equity 3,295 3,183 3,079 2,979 2,875
Total Liabilities and Equity 4,867 3,700 3,548 3,315 3,116
Working Capital 2,519 2,407 2,303 2,203 2,099
 Balance Shee
1993 Jan Feb Mar Apr
Cash 200
Accounts Receivable 2,905 1,060 260 300 300
Inventory 586 1,008 1,417 1,813 2,221
Current Assets 3,691 2,068 1,677 2,113 2,521
Net Plant and Equipment 1,176 1,176 1,176 1,176 1,176
Total Assets 4,867 3,244 2,853 3,289 3,697
Accounts Payable 282 150 150 150 150
Notes Payable 752 - - - -
Accrued Taxes 88 31 - 23 - 162 - 251
Long Term Debt, Current Portion 50 50 50 50 50
Current Liabilities 1,172 231 177 38 - 51
Long Term Debt 400 400 400 400 400
Shareholders' Equity 3,295 3,183 3,079 2,979 2,875
Total Liabilities and Equity 4,867 3,814 3,656 3,417 3,224
Working Capital 2,519 1,837 1,500 2,075 2,572

Inventory
Jan Feb Mar Apr May
Opening 586 1,008 1,417 1,813 2,221
Produced 500 500 500 500 500
Sold 78 91 104 91 91
Closing 1,008 1,417 1,813 2,221 2,630
 Income Statement (seasonal production)
May Jun Jul Aug Sep Oct Nov Dec Total
140 140 160 1,620 1,840 2,140 2,285 1,115 10,000
98 98 112 1,134 1,288 1,498 1,600 780 7,000
42 42 48 486 552 642 685 335 3,000
200 200 200 200 200 200 200 200 2,400
4 4 3 5 12 17 17 14 95
3 3 2 1 1 1 1 1 28
- 159 - 159 - 153 282 341 426 469 122 533
- 54 - 54 - 52 96 116 145 159 42 182
- 105 - 105 - 101 186 225 281 310 80 351

Income Statement (level production)

May Jun Jul Aug Sep Oct Nov Dec Total
140 140 160 1,620 1,840 2,140 2,285 1,115 10,000
91 91 104 1,055 1,198 1,393 1,488 726 6,510
49 49 56 565 642 747 797 389 3,490
210 210 210 210 210 210 210 210 2,515
4 4 3 5 12 17 17 14 95
3 3 2 1 1 1 1 1 28
- 162 - 162 - 155 352 422 521 572 167 908
- 54 - 54 - 52 96 116 145 159 42 182
- 108 - 108 - 103 256 306 376 413 125 726
219 169

Balance Sheet (seasonal Production)

May Jun Jul Aug Sep Oct Nov Dec
915 696 527 200 200 200 200 200
280 280 300 1,780 3,460 3,980 4,425 3,400
586 586 586 586 586 586 586 586
1,781 1,562 1,413 2,566 4,246 4,766 5,211 4,186
1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176
2,957 2,738 2,589 3,742 5,422 5,942 6,387 5,362
42 42 48 486 552 642 686 334
- - - 433 1,741 1,745 1,677 942
- 305 - 394 - 448 - 352 - 271 - 126 33 40
50 50 50 50 50 50 50 50
- 213 - 302 - 350 617 2,072 2,311 2,446 1,366
400 375 375 375 375 375 375 350
2,770 2,665 2,564 2,750 2,975 3,256 3,566 3,646
2,957 2,738 2,589 3,742 5,422 5,942 6,387 5,362
1,994 1,864 1,763 1,949 2,174 2,455 2,765 2,820
Balance Sheet (level Production)
May Jun Jul Aug Sep Oct Nov Dec

280 280 300 1,780 3,460 3,980 4,425 3,400

2,630 3,039 3,435 2,880 2,183 1,289 302 76
2,910 3,319 3,735 4,660 5,643 5,269 4,727 3,476
1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176
4,086 4,495 4,911 5,836 6,819 6,445 5,903 4,652
150 150 150 150 150 150 150 150
- - - 433 1,741 1,745 1,677 942
- 305 - 394 - 448 - 352 - 271 - 126 33 40
50 50 50 50 50 50 50 50
- 105 - 194 - 248 281 1,670 1,819 1,910 1,182
400 375 375 375 375 375 375 325
2,770 2,665 2,564 2,750 2,975 3,256 3,566 3,646
3,065 2,846 2,691 3,406 5,020 5,450 5,851 5,153
3,015 3,513 3,983 4,379 3,973 3,450 2,817 2,294

Inventory level
Jun Jul Aug Sep Oct Nov Dec
2,630 3,039 3,435 2,880 2,183 1,289 302
500 500 500 500 500 500 500
91 104 1,055 1,198 1,393 1,488 726
3,039 3,435 2,880 2,183 1,289 302 76
833
583
 Income Statement (
Jan Feb Mar Apr May
Net Sales 120 140 160 140 140
COGS 84 98 112 98 98
Gross Profit 36 42 48 42 42
Operating Expenses 200 200 200 200 200
Interest Expense 7 4 4 4 4
Interest Income 2 4 5 4 3
PBT - 169 - 158 - 151 - 158 - 159
Income Taxes - 57 - 54 - 51 - 54 - 54
PAT - 112 - 104 - 100 - 104 - 105

Balance Sheet (seasonal Pr

1993 Jan Feb Mar Apr May
Cash 200 878 1,526 1,253 1,054 915
Accounts Receivable 2,905 1,060 260 300 300 280
Inventory 586 586 586 586 586 586
Current Assets 3,691 2,524 2,372 2,139 1,940 1,781
Net Plant and Equipment 1,176 1,176 1,176 1,176 1,176 1,176
Total Assets 4,867 3,700 3,548 3,315 3,116 2,957
Accounts Payable 282 36 42 48 42 42
Notes Payable 752 - - - - -
Accrued Taxes 88 31 - 23 - 162 - 251 - 305
Long Term Debt, Current Portion 50 50 50 50 50 50
Current Liabilities 1,172 117 69 - 64 - 159 - 213
Long Term Debt 400 400 400 400 400 400
Shareholders' Equity 3,295 3,183 3,079 2,979 2,875 2,770
Total Liabilities and Equity 4,867 3,700 3,548 3,315 3,116 2,957
Working Capital 2,519 2,407 2,303 2,203 2,099 1,994

Income Statemen
Jan Feb Mar Apr May
Net Sales 120 140 160 140 140
COGS 78 91 104 91 91
Gross Profit 42 49 56 49 49
Operating Expenses 168.75 168.75 168.75 168.75 168.75
Interest Expense 7 4 4 4 4
Interest Income 2 4 5 4 3
PBT - 132 - 120 - 112 - 120 - 121
Income Taxes - 57 - 54 - 51 - 54 - 54
PAT - 75 - 66 - 61 - 66 - 67
 Income Statement (seasonal production)
Jun Jul Aug Sep Oct Nov Dec Total
140 160 1,620 1,840 2,140 2,285 1,115 10,000
98 112 1,134 1,288 1,498 1,600 780 7,000
42 48 486 552 642 685 335 3,000
200 200 200 200 200 200 200 2,400
4 3 5 12 17 17 14 95
3 2 1 1 1 1 1 28
- 159 - 153 282 341 426 469 122 533
- 54 - 52 96 116 145 159 42 182
- 105 - 101 186 225 281 310 80 351

ance Sheet (seasonal Production)

Jun Jul Aug Sep Oct Nov Dec
696 527 200 200 200 200 200
280 300 1,780 3,460 3,980 4,425 3,400
586 586 586 586 586 586 586
1,562 1,413 2,566 4,246 4,766 5,211 4,186
1,176 1,176 1,176 1,176 1,176 1,176 1,176
2,738 2,589 3,742 5,422 5,942 6,387 5,362
42 48 486 552 642 686 334
- - 433 1,741 1,745 1,677 942
- 394 - 448 - 352 - 271 - 126 33 40
50 50 50 50 50 50 50
- 302 - 350 617 2,072 2,311 2,446 1,366
375 375 375 375 375 375 350
2,665 2,564 2,750 2,975 3,256 3,566 3,646
2,738 2,589 3,742 5,422 5,942 6,387 5,362
1,864 1,763 1,949 2,174 2,455 2,765 2,820

Income Statement (levelproduction)

Jun Jul Aug Sep Oct Nov Dec Total
140 160 1,620 1,840 2,140 2,285 1,115 10,000
91 104 1,055 1,198 1,393 1,488 726 6,510
49 56 565 642 747 797 389 3,490
168.75 168.75 168.75 168.75 168.75 168.75 168.75 2,025 375
4 3 5 12 17 17 14 95
3 2 1 1 1 1 1 28
- 121 - 114 393 462 562 613 207 1,398
- 54 - 52 96 116 145 159 42 182
- 67 - 62 297 346 417 454 165 1,216