PROBLEM 1 Vanhorn Company sells tennis racquets; variable costs for each are $75, and each is sold for $105. Vanhorn incurs $ 270,000 of fixed operating expenses annually. 1. Determine the sales volume in units and dollars required to attain a $ 120,000 profit. Verify your answer by preparing the income statement using the contribution margin format 2. Vanhorn is considering establishing a quality improvement process that will require a $ 10 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plan to spend an additional $ 60,000 for advertising. Assuming that the improvement programme will increase sales to a level that is 5,000 above the amount computed in question 1, should Vanhorn proceeds with plans to improve product quality? Support your answer by preparing a budgeted income statement 3. Determine the new break-even point (units and $ sales) assuming Vanhorn adopts the quality improvement programme 4. At the end of the year, the actual results are : a. Units sales are 15,000, with a selling price per unit of $ 104 b. The variable costs per unit are $ 72 and the fixed operating expenses amount to $ 270,000 Prepare the actual income statement and compare it to the one prepared in question 1. Compute the sales variance and its components, the profit variance and its components. PROBLEM 2 INCOME STATEMENT 2002 2003 Sales Cost of Goods Sold 500'000 350'000 550'000 410'000 Gross Margin 150'000 140'000 Selling expenses Administrative expenses Depreciation 60'000 30'000 15'000 61'000 32'000 15'000 Operating Income ( EBIT 45'000 32'000 Interest expense 13'000 11'000 Income before Tax Tax 32'000 11'200 21'000 7'350 Net Income 20'800 13'650 BALANCE SHEET 2002 2003 Cash & Banks Account Receivable Inventory 5'000 100'000 80'000 13'000 106'000 89'000 Current assets 185'000 208'000 Building & Equipment Allowance for Depreciation 200'000 (120'000) 220'000 (135'000) Fixed Assets 80'000 85'000 Total Assets 265'000 293'000 Accounts Payables Accruals 70'000 18'000 84'000 15'350 Current Liabilities 88'000 99'350 Long term Debt 80'000 78'000 Common Stock Retained earnings 50'000 47'000 60'000 55'650 Equity 97'000 115'650 Total Liabilities & Equity 265'000 293'000 1. Using the income statement analysis tools (common sized, variances), how do you evaluate the 2003 results versus 2002. Management has also indicated that price, on average, has deteriorated by 5% during 2003. As a banker looking for granting a loan to the Company, how do you evaluate the situation of the company in 2003? Use financial ratios to justify your comments and decision 2. How would you comment the asset management performance in 2003 versus 2002? Justify your comments with all related ratios 3. Calculate the ROI and ROE for the 2 years 4. Prepare the Cash Flow statement (indirect method) with the following additional information: a. the Company purchased equipment for $ 20,000, 50% of which were paid in exchange of shares issued b. Dividends declared and paid in 2003 amounted to $ 5,000 What can you conclude from the Cash generated/used by activity? Do the assignment. all numbers must be done. Slides FSA is to help you.