Butler Lumber Case

Topics: Balance sheet, Revenue, Inventory Pages: 5 (1395 words) Published: February 6, 2012
Butler Lumber Company Case

Butler Lumber Company Case
Summary of facts: In 1981 by Mark Butler and his brother-in-law Henry Stark founded the Butler Lumber Company. In 1988 Mr. Butler bought Mr. Stark’s share for $105,000 to be paid of in 1989 out of which $70,000 was raised by a loan carrying an interest rate of 11% and repayable at the rate of $7,000 over the next 10 years. Over the past five years, Butler Lumber Company has experienced rapid growth in its business. It derives its business from retail distribution of lumber products in the local area. A large portion of its business is based in repair services, and as a result, it should be somewhat protected from a downturn in the real estate market. Sales volume has built up largely due to successful price competition, made possible by careful control of operating expenses, and quantity purchases at substantial discounts. Mark Butler, sole owner and president of the Butler Lumber Company is looking to increase the company borrowing. Suburban National Bank currently holds $247,000 of its debt. In order to increase its borrowing, Butler Lumber Company will have to switch debt holders from Suburban National to Northrop National Bank. Northrop National is currently analyzing the financial stability of Butler Lumber Company. Problems: Butler Lumber Company has a problem with a shortage of cash resulting in an inability to satisfy the expansion of its rapidly growing business as evident by the balance sheet forecast for 1991(Exhibit 2). For this reason, Mr. Butler is seeking a larger unsecured loan in order to satisfy the company’s immediate need for cash. Northrop National Bank is prepared to offer Butler Lumber Company a loan of up to $465,000. Will $465,000 be enough to satisfy Butler Lumber’s expanding business? (We are assume a 1991 sales volume of $3.191 million). Why has sales growth been so strong while net income growth has been feeble at best? Butler Lumber Company

Estimated Income Statement Dec. 31, 1991 (Thousands of Dollars)

Net sales$ 3,191 22.5% of yearly revenue
Cost of Goods Sold:
Beginning inventory418 From given Data
Purchases2,4123,191.11*0.756% Of sales based on three previous years $ 2,830
Ending inventory(565)(COGS-beg inv - purchase)
Total Cost of Goods Sold$ 2,2663,191.11*0.71% Of sales based on three previous years Gross profit925
Operating expenses(798)3,191.11*0.25% Of sales based on three previous years Operating Profit127
Purchase Discounts35 2% of Purchases after April 1st
Earnings before interest and taxes$ 162
Interest expense (48)10+(315*12.5%)From given Data
Net income before income taxes$ 114
Provision for income taxes(27)
Net income$ 87
Analysis: We have prepared pro forma Balance Sheet and Income Statement for the period ending December 31, 1991 in order to determine how much Butler Lumber will need in additional debt financing if it is to expand as planned.

We believe that Northrop National’s Net Sales estimate of 3.6 million for 1991 is overly confident. Historically, 55% of total yearly net sales are made during the second and third quarter. We can thereby assume that the first quarter revenue of $718,000 is 22.5% of the total yearly revenue. As a result, our analysis has resulted in a forecast of $3.191 million for 1991. Beginning inventory is derived from last year’s ending inventory. Purchases are projected from an average trend of 75.6% of sales over the past three years. Total Cost of Goods Sold is based on average of 25% of sales over past three years. Interest expense is calculated by adding $10,000 to interest expense of loan amount calculated in balance sheet with the rate of 12.5% percent given in the case. Butler Lumber Company is taxed at the rate of 15% on its first $50,000 of income, 25% on the next $25,000, and 34% on...
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