Cutrite Shears Case Study
Essay by mhobbs • February 1, 2016 • Case Study • 3,952 Words (16 Pages) • 4,585 Views
Cutrite Shears, Inc.
Homework #1
Section: Monday Afternoon
Group: Marland Hobbs (working alone)
Due Monday, January 11, 2016, at Noon
Please submit your assignment electronically via the Chalk site, indicating your section and group members.
(40 points). Why was Cutrite Shears unable to repay its bank loan by March 31, 1970 as originally forecast? Please consider monthly variations of actual data from forecast data, with respect to both the balance sheet and income statement, in preparing your answer. Comment upon the assumptions Mr. Schultz made when drawing up the original forecasts.
There were significant differences between what was forecasted by Mr. Schultz and what actually transpired. First, there were deltas between forecasted sales figures. For example in February of 1970, the sales figure and net income figures were 17% and 95.6% less than what was forecasted. Schultz explained that this was due to a recession in the economy. Inventories starting in September of 1969 were significantly higher than forecasted as result of sales drop peaking in January 1970 when inventories were 18.2% higher. Additionally, current liabilities jumped 30% and 100% higher in November in December of 1969. Schultz was starting to have cash tied up in assets with increasing short term liabilities. Schultz increased purchases in September and October of 1969 to 280 and 290 from 260 at a time when sales were decreasing in comparison to the budget. This decision makes little sense.
Second, Schultz made erroneous assumptions regarding collections and payables periods. He incorrectly forecasted how much the expenditures for modernization would cost by 150K. Also, he eventually had to lay off labor because he could not afford to pay them creating additional costs. He assumed that collections would lag behind sales by 45 and that he would have a 30 payment period. These assumptions were incorrect as discussed below.
2. (30 points). Determine Cutrite’s liquidity position at the end of each quarter, 9/30/69 through 3/30/1970, versus the forecast. Determine the actual versus forecast differences in Cutrite’s current ratio, acid-test ratio, receivables-to-sales ratio, collection period, inventory turnover, total debt to net worth, and net income to net worth. Comment upon whether these ratios are within normative ranges.
Ratios - Actual | Jul-69 | Aug-69 | Sep-69 | Oct-69 | Nov-69 | Dec-69 | Jan-70 | Feb-70 | Mar-70 |
Collection period | 41 | 42 | 43 | 42 | 49 | 60 | 68 | 55 | 53 |
Inventory turnover | 193 | 152 | 123 | 88 | 99 | 116 | 197 | 197 | 230 |
Days sales in cash | 21 | 12 | 11 | 9 | 11 | 12 | 27 | 27 | 23 |
Payables period | 18 | 14 | 13 | 11 | 12 | 12 | 20 | 18 | 16 |
Debt to Asset | 37.2% | 39.6% | 40.8% | 40.2% | 38.6% | 38.2% | 36.9% | 35.8% | 35.4% |
Debt to Equity | 59.1% | 65.6% | 68.9% | 67.3% | 62.9% | 61.8% | 58.4% | 55.9% | 54.9% |
Current Ratio | 5.2 | 3.1 | 2.8 | 2.9 | 3.4 | 3.3 | 3.9 | 4.6 | 5.2 |
Net income to net worth | 0.4% | 0.8% | 1.0% | 2.0% | 1.5% | 1.1% | 0.3% | 0.0% | (0.1%) |
Recievables to sales | 1.4 | 1.4 | 1.4 | 1.4 | 1.6 | 2.0 | 2.3 | 1.8 | 1.8 |
Acid-test ratio | 1.8 | 1.1 | 1.1 | 1.4 | 1.7 | 1.7 | 1.7 | 1.8 | 1.8 |
Ratios - Proforma | Jul-69 | Aug-69 | Sep-69 | Oct-69 | Nov-69 | Dec-69 | Jan-70 | Feb-70 | Mar-70 |
Collection period | 41 | 42 | 42 | 41 | 47 | 48 | 54 | 45 | 48 |
Inventory turnover | 68 | 69 | 70 | 62 | 79 | 80 | 89 | 75 | 79 |
Days sales in cash | 17 | 13 | 11 | 8 | 9 | 11 | 38 | 46 | 38 |
Payables period | 18 | 14 | 12 | 8 | 10 | 12 | 19 | 19 | 22 |
Debt to Asset | 36.6% | 39.6% | 40.1% | 39.2% | 36.8% | 34.5% | 34.6% | 34.8% | 34.0% |
Debt to Equity | 57.8% | 65.6% | 67.0% | 64.4% | 58.3% | 52.8% | 53.0% | 53.3% | 51.5% |
Current Ratio | 5.8 | 3.2 | 3.0 | 3.2 | 4.3 | 6.0 | 5.7 | 5.5 | 6.9 |
Net income to net worth | 0.6% | 1.0% | 1.5% | 1.9% | 1.9% | 1.4% | 0.5% | 0.5% | 0.3% |
Receivables to sales | 1.4 | 1.4 | 1.4 | 1.4 | 1.6 | 1.6 | 1.8 | 1.5 | 1.6 |
Acid-test ratio | 1.9 | 1.2 | 1.3 | 1.7 | 2.4 | 3.2 | 3.0 | 2.8 | 3.0 |
Ratios - Actual – Proforma (delta) | Jul-69 | Aug-69 | Sep-69 | Oct-69 | Nov-69 | Dec-69 | Jan-70 | Feb-70 | Mar-70 |
Collection period | 0 | 0 | 1 | 1 | 2 | 12 | 14 | 10 | 5 |
Inventory turnover | 125 | 82 | 52 | 26 | 21 | 37 | 108 | 122 | 151 |
Days sales in cash | 3 | (1) | 0 | 1 | 2 | 1 | (11) | (20) | (15) |
Payables period | 0 | (0) | 1 | 3 | 2 | 0 | 1 | (1) | (6) |
Debt to Asset | 0.5% | 0.0% | 0.7% | 1.0% | 1.8% | 3.6% | 2.2% | 1.1% | 1.4% |
Debt to Equity | 1.3% | 0.0% | 1.9% | 2.9% | 4.6% | 9.0% | 5.4% | 2.6% | 3.3% |
Current Ratio | (0.6) | (0.0) | (0.2) | (0.4) | (0.9) | (2.7) | (1.8) | (0.9) | (1.6) |
Net income to net worth | (0.0015) | (0.0023) | (0.0051) | 0.0016 | (0.0042) | (0.0036) | (0.0023) | (0.0049) | (0.0037) |
Receivables to sales | 0.0 | 0.0 | 0.0 | 0.0 | 0.1 | 0.4 | 0.5 | 0.3 | 0.2 |
Acid-test ratio | (0.1) | (0.0) | (0.1) | (0.3) | (0.7) | (1.6) | (1.3) | (1.0) | (1.2) |
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