Surecut Case

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SURECUT SHEARS

1. What assumptions did Mr. Fischer make when he prepared the forecasts shown in case Exhibits 1 and 2? Were these assumptions reasonable?

Mr. Fischer made assumptions for both the income statement and the balance sheet.

Income statement

We calculate the percentage of variation from one month to another in terms of sales and gross profit.

| July| Aug| Sept| Oct| Nov| Dec| Jan| Feb| March| April| May| June| Sales| 2100| 2700| 3300| 4500| 3900| 3300| 2100| 2100| 1800| 1500| 1200| 1500| % growth|  | 22,2%| 18,2%| 26,7%| -15,4%| -18,2%| -57,1%| 0,0%| -16,7%| -20,0%| -25,0%| 20,0%| Gross profit| 540| 780| 1020| 1500| 1260| 1020| 540| 540| 420| 300| 180| 300| % growth|  | 30,8%| 23,5%| 32,0%| -19,0%| -23,5%| -88,9%| 0,0%| -28,6%| -40,0%| -66,7%| 40,0%|

When Mr. Fischer prepared the forecast of his income statement he assumed that sales were going to be higher during the months of the seasonal peak (July – December). Even if the last months the % growth is negative, it is still much higher compared to the other season. Assuming this increase in sales, he forecasted that additional working capital (materials and labor) was going to be needed to be able to support this increase in this period. However he considered overhead costs (including straight line depreciation) as an average over the twelve months without considering seasonal conditions. As gross profit changes with sales, in view of his prediction of an increase in sales in the seasonal peak, gross profit will therefore increase too. Expenses were calculated as an average annual expense based on last’s year. Finally, Mr. Fischer fixed a quarterly dividend through the year, except for the last quarter where it is doubled.

Balance sheet

| July| Aug| Sept| Oct| Nov| Dec| Jan| Feb| March| April| May| June| Cash| 736| 736| 736| 736| 736| 1119| 2594| 3169| 2371| 2196| 1721| 736|...
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