Morrissey Forgings, Inc.

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1-a. What is your estimate of the 1983 income statement and balance sheet?

Morrissey Forgings, Inc.
Balance Sheet 1983



b. What is your estimate of Return on Assets in 1983? (Assume a 40% tax rate.) How is the company doing in 1983? For simplicity, you may assume that individual price and cost components have not changed 1983 and 1985.

From the Income statement we have that profit before taxes equals to $1,790,000.00.

$1,790,000.00 * 40% (tax rate) = $716,000.00

Net income = Profit before taxes – Taxes = $1,790,000 - $716,000 = $1,074,000

Return on assets (ROA) = Net Income/Total Assets = $1,074,000/12,890,000 = 0.08= 8%

As we all know, the higher the ROA number, the better, because the company is earning more money on less investment. In this specific case the ROA is 8%, which means that the company has to invest more of its assets to earn more money. We could also say that this company is not good at converting its investment into profit, since it only earns $0.08 cents on each dollar of assets invested. It will be better to make more profit with little investment.

Morrissey Forgings, Inc.
Income Statement 1983



In order to do the Balance Sheet for 1983, I assumed the following facts:

Cash - $9,000,000.00 ($9,000,000 on sales)
Beginning of year Inventory - $0.00, however, I considered the $1,200,000 of materials as part of my inventory. Account receivable - $0.00
I assumed that the company incurred in the following expenses in the production of the 30,000 units that the company sold: General expenses - $1,500,000
Labor - $1,500,000
Rent - $550,000
Sales commission - $450,000
Selling and Shipping in 1985 were two and a half times what they were in 1983. Selling and shipping = ($1,625,000 + $1,300,000)/2.5= $1,170,000.00 Accumulated depreciation – 7 years from 1977 to 1983, so 7 years * $800,000 = $5,600,000.00 Property equipment – $800,000 * 15 years= $12,000,000

Total Liabilities and Owner’s equity equal to total Assets.

2-Taking a closer look at cost allocation for manufacturing, selling and shipping expenses, what is your estimate of ovens profit and stoves profit for 1985?

Morrissey Forgings, Inc.
Income Statement 1985 (Ovens & Stoves)



My estimate is a loss of ($270,000.00) for stoves and a profit of $115,000.00 for ovens for the period of 1985.

3-What is your estimate of the income statement for 1986 if only ovens were sold (30,000 units)?

Morrissey Forgings, Inc.
Income Statement 1986 (Ovens)



4-How much does it cost, on average, to ship a stove within the core area? How much does it cost, on average, to ship a stove outside the core area?

Total shipping cost for stoves from Exhibit 1= $1,300,000.00

Stoves sales from Exhibit 1 = $7,500,000.00, assuming that all the stoves were sold outside the core area.

Outside the core area shipping costs were about 17% of sales. So,

$7,500,000.00 * 17%=$1,275,000.00/25,000 units= $51.00 to ship a stove outside the core area.

Total shipping cost – outside of core area shipping cost= within the core area shipping cost

$1,300,000 - $1,275,000 = $25,000/25,000 units=$1.00 to ship a stove within the core area.

5-How much does it cost, on average, to generate a sales order for stoves in the core area (order getting costs)? How much does it cost, on average, to generate a sales order for ovens outside the core area? So what?

Total Selling Cost - $3,125,000, which include:
Advertising and promotion (6% of total sales $14,500,000) - $870,000 Order getting cost is $2,255,000

ovens were sold outside of the core area.

6-How big an order (number of units) is needed for ovens outside the core area for the order to be profitable? For stoves? So what?

1983 to 1985. I believe that the company should try to reduce selling and shipping costs for stoves. In addition, since the company is already expending a considerable amount...
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