Corporate Finance
MGMT E2700 Fall 2020
Case assignment
Professor Gandevani
Page 1 of 9
Sunny Corporation Fixed vs. Seasonal Monthly Production
Sunny Corporation is a manufacturing company. Due to the nature of the business, its sales are
seasonal, where there are months with high sales volume and months with low to no sales. Within
the management, there are two opinions about operation on how to deal with this business model.
As CEO you must evaluate which opinion will maximize shareholder wealth.
The cu
ent operation in practice is championed by Paul, the director of production. Paul is
maintaining a staple group of full-time employees around the year to ensure quality of products. To
keep the employees productive during low volume months, Paul decides to produce a fixed amount
of inventory each month. This helps to preserve employees’ product making skill with no downtime.
However, to financially support production during low volume months, short term loans are used
to cover cash shortage.
Betty, the new director of finance, has offered an alternative mode of operation by having a seasonal
production, where monthly production matches the same month’s sales volume. Betty believes
having a seasonal production will greatly reduce interest expenses and will improve the company
overall performance. Betty’s idea will create some changes in the work force and potential
downtime.
You, the CEO, is looking at Sunny’s information table 1-6 based on the cu
ent mode of operation,
where the company fiscal year is from October to September. During 2019, Sunny has achieved an
annual return of equity of 15% and a profit margin of 2.25%. Sunny operates in an area with no
corporate income tax. You must decide which to adopt by analyzing the effect of both mode of
operation and how the effect compares with industry benchmarks. (Total 100 points. All formulas
used must be from the course textbook. Please submit One pdf file combining write up, revised
tables and calculation on Canvas before due date. All numbers in the case are hypothetical. See
the grading ru
ic on specific case requirements.)
Required Questions 1. Tables 1 through 5 contains the financial information
describing the effects of level production on inventory, cash
flow, loan balances, and interest expense. Reproduce these
tables if Betty’s suggestions were implemented; that is,
change the Production This Month column in Table 2 from 400
each month to 100, 75, 50, and so on, to match Sales in the
next column. Then recompute the remainder of Table 2, and
Tables 3, 4, and 5 based on the new production numbers.
Beginning inventory is still 400 units. Beginning cash is still
$125,000 and that remains the minimum required balance.
Corporate Finance
MGMT E2700 Fall 2020
Case assignment
Professor Gandevani
Page 2 of 9
Sunny operates in an area where there is no corporate income
tax. Be sure to present all revised tables and justify which
production method is better. Support your justification with
at least one ratio from each of the following categories with a
total ratio of seven or more. Categories include: Profitability,
Financial Leverage, Asset Utilization, Debt Utilization, and
Liquidity. Must make comparison with benchmarks in table 6.
(60 Points)
2. Given that Sunny Corporation is charged 12 percent annual
interest (1 percent a month) on its cumulative loan balance each
month (Table 5), how much would Betty’s suggestion save in
interest expense in a year? Be sure to show your table and
calculation. (15 Points)
3. Up until now, we have not considered any inefficiencies that
have been introduced as a result of going from level to
seasonal production. Assume that there is an added expense
for each sales dollar of .5 percent XXXXXXXXXXBased on this fact and
the information computed in question 2, mainly table 3 and 5,
is seasonal production justified? Be sure to justify with
calculation of interests saved. No need to recreate all tables
or all ratios, only re-create table 3 and XXXXXXXXXXPoints)
Corporate Finance
MGMT E2700 Fall 2020
Case assignment
Professor Gandevani
Page 3 of 9
Grading Ru
ic
Excellent Good Average Unacceptable
Q1 60 pts
No calculation e
ors.
All revised table 1-5 are
included. 7 or more
atios from the
equired categories are
presented. Show
mastery of material by
linking the justification
to all tables and ratios.
55-60 pts
All revised table and all
atios from all required
categories are
presented with a few
minor calculation issues.
Must support
justification with
explanation of ratios
and tables XXXXXXXXXXpts
Missing revised tables
1-5 or required 7
atios from each
equired category.
Justification is not
supported by tables
and ratios XXXXXXXXXXpts
Major omission from
equirement to no
submission 0-30 pts
Q2 15 pts
E
or free calculation
with all steps shown.
13-15 pts
Minor interest
calculation with all
calculation steps
provided 9-12 pts
Major calculation
e
or in the interest
calculation and or no
calculation steps
shown. 5-8 pts
Major omission from
equirement to no
submission 0-4 pts
Q3 15 pts
Justify decision with
interest savings. E
or
free calculation with all
steps shown XXXXXXXXXXpts
Justify decision with
interest savings. Minor
interest calculation with
all calculation steps
provided 9-12 pts
Major calculation
e
or in the interest
calculation and or no
calculation steps
Missing justification
shown. 5-8 pts
Major omission from
equirement to no
submission 0-4 pts
Structure 5 pts
E
or free professional
presentation 5 pts
A few minor grammar or
presentation issues 3-4
pts
Many grammar or
presentation issues 1-
2 pts
Unprofessional
presentation 0 pts
APA format 5 pts
E
or free APA format.
Must include citation,
cover page, table of
content, introduction,
discussion and analysis,
and conclusion. 5 pts
A few minor APA format
e
ors. 4 pts
Many APA e
ors 1-2
pts
APA in text and
citation format not
followed. 0 pts
Corporate Finance
MGMT E2700 Fall 2020
Case assignment
Professor Gandevani
Page 4 of 9
Table 1 Sales Forecast in Units
Table 1
Sales Forecast in
Units
1st
QTR Oct XXXXXXXXXX
Nov 75
Dec 50
2nd
QTR Jan 2021 0
Feb 0
Mar 250
3rd
QTR Apr 550
May 900
Jun 1100
4th Qtr July 1000
Aug 550
Sep 200
Table 2 Production Schedule and Inventory (equal monthly production)
Beginning Production
Sales
End Inventory
Inventory This Inventory $2,000 Sales
Month per unit in $
October XXXXXXXXXX700 $1,400,000 $ XXXXXXXXXX,000
November XXXXXXXXXX $2,050,000 $ XXXXXXXXXX,000
December XXXXXXXXXX $2,750,000 $ XXXXXXXXXX,000
January XXXXXXXXXX $3,550,000 $ -
Fe
uary XXXXXXXXXX $4,350,000 $ -
March XXXXXXXXXX $4,650,000 $ XXXXXXXXXX,000
April XXXXXXXXXX $4,350,000 $ 1,650,000
May XXXXXXXXXX $3,350,000 $ 2,700,000
June XXXXXXXXXX $1,950,000 $ 3,300,000
July XXXXXXXXXX $750,000 $ 3,000,000
August XXXXXXXXXX $450,000 $ 1,650,000
Corporate Finance
MGMT E2700 Fall 2020
Case assignment
Professor Gandevani
Page 5 of 9
September XXXXXXXXXX $850,000 $ XXXXXXXXXX,000
Table 3 Sales Forecast, Cash Receipts and Payments, and Cash Budget
October
November December January Fe
uary March Unit 2020
Price/Cost Sales Forecast
Sales (units XXXXXXXXXX250
Sales unit price: $3,000 $300,000 $225,000 $150,000 $0 $0 $750,000
Cash Receipts Schedule
Cash 50% $150,000 $112,500 $75,000 $0 $0 $375,000
From prior month’s sales* 50%
$
375,000
$150,000 $112,500 $75,000 $0 $0
Total cash receipts $525,000 $262,500 $187,500 $75,000 $0 $375,000
Cash Payments Schedule
Production in units XXXXXXXXXX400 400
Production costs
$
2,000.00
$
800,000.00
$
800,000.00
$
800,000.00
$
800,000.00
$
800,000.00
$
800,000.00
Fixed overhead
$
200,000.00
$
200,000.00
$
200,000.00
$