FIN 3030 Week-6 Assignment-2

  

Orange Company is evaluating its financing requirements for the coming year. The firm has been in business for only three years, and the firm’s chief financial officer (Erica Stevens) predicts that the firm’s operating expenses, current assets, and current liabilities will remain at their current proportion of sales.

Last year Orange had $20 million in sales with net income of $1 million. The firm anticipates that next year’s sales will reach $27 million with net income rising to $2 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.

The firm’s balance sheet for the year just ended is found below:

    

12/31/09

%   of Sales

 

Current   assets

$4,000,000

20%

 

Net   fixed assets

8,000,000

40%

 

Total   Assets

$12,000,000

 

Accounts   payable

$3,000,000

15%

 

Long-term   debt

2,000,000

NA

 

Total   Liabilities

$5,000,000

 

Common   stock

1,000,000

NA

 

Paid-in   capital

1,800,000

NA

 

Retained   earnings

4,200,000

NA

 

Total   Equity

7,000,000

NA

 

Total   Liability & Equity

$12,000,000

 

1. Estimate Orange’s total financing requirements for 2010 and its      net funding requirements. 
2. Orange Company is considering manufacturing communication      equipment for the military. The average selling price of its finished      product is $175 per unit. The variable cost for these same units is $140      per unit. This project incurs fixed costs of $550,000 per year. 
   1. What is the break-even point in units for the project? 
   2. What is the dollar sales volume the firm must achieve to reach       the break-even point? 
   3. What would be the firm’s profit or loss at the following units of       production sold: 12,000 units? 15,000 units? 20,000 units?