Butler Lumber Company
Butler has a problem with a shortage of cash that is not allowing them to expand the business. Butler Lumber needs a larger unsecured loan that would allow them to expand the business. The company expects larger sales figures in the near future and must act accordingly and meet supply needs for forecasts. Therefore Butler Lumber needs to determine if it wants to grow the business or stay happy where they are.
Butler has a few options in regards to taking a line of credit with Northrup National Bank of $465,000. Butler has recently not taken many purchase discounts due to shortage of funds. If Butler receives the loan, the company would have enough working capital to be able to take advantage of the net discounts. Sales have increased from '88-'89 15.7%, '89-'90 25.28%, and expected sales increase from '90-'91 is 25.17%. Sales have been built on price competition, but could generate much more by hiring more salespeople. Butler only has 5 salespeople and could hire two more. If Butler did hire 2 more experienced salespeople, they could expect sales to jump another 1,440 K (3,600 K total sales / 5 sales people = 720 K per salesperson). Having hired these sales people, sales would increase to (3,600 K + 1,400 K = 5,040 K) 5,040 K for 1992. This would be a compromised forecast given that each other salespersons sales stay constant in a growing period. Having these sales and having cost of goods sold stay constant, expenses rise steadily (more salaries, more expenses, higher cost for loan), and taxes stay the same, net income would rise (5,040 Net Sales - 2,900 Cost of Goods Sold -1,200 Expeses-50 interest expense (50 K * .15 + 25 K *.25 + 815 K *.34) 291 Taxes = 599 K in Net Profit). Also, when more sales are made, there may be more help needed in trucking and yard help, these adjustments were considered in forecast. The other option down the road is to expand business along railway and incorporate sales and...
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