SureCut shears case study
What assumptions did Mr. Fischer make when he prepared the forecasts shown in case Exhibits 1 and 2? Were these assumptions reasonable?
General Assumptions
1. The company has seasonality in sales
This assumption is reasonable as the business has been shown to have different rates of sales in different months.
Assumptions (Income Statement)
1. Sales for the year will be consistent with the previous year (only a small decrease)
This assumption is reasonable since a decline in sales was not predicted until January 1996; only a negligible decline was forecasted. This assumption is in fact conservative given that the company has been growing consistently throughout the past years.
2. COGS will be consistent with the previous year
Mr. This assumption is not entirely reasonable since Mr. Fischer has estimated a reduction in manufacturing costs of $900,000 however this is not accounted for in the income statement. However this makes the forecast even more conservative.
3. Overheads are constant
He assumes the overheads to be 300 throughout the year, which seems to be reasonable as the production is constant during the year. Furthermore it is close to last years average of 296.
4. Selling and administrative expenses will be maintained at previous levels
This assumption is reasonable as there are no expected significant changes to this area of the business.
5. Not showing any interest expense
He is not accounting for interest expense in his pro-forma statement.
Assumptions (Balance Sheet)
6. Accounts Receivable
Assumption is okay since there is no reason to expect a change in customer behavior and sales are the same as the previous year
7. Investments in Plant increase by $3,000,000 during the first 2 months of the forecast.
This assumption is reasonable as it is predicated that the modernization project will be completed in August. No other investments are expected to be needed.
8. Accounts Payable, he assumes a 30-day payment period for and
General Assumptions
1. The company has seasonality in sales
This assumption is reasonable as the business has been shown to have different rates of sales in different months.
Assumptions (Income Statement)
1. Sales for the year will be consistent with the previous year (only a small decrease)
This assumption is reasonable since a decline in sales was not predicted until January 1996; only a negligible decline was forecasted. This assumption is in fact conservative given that the company has been growing consistently throughout the past years.
2. COGS will be consistent with the previous year
Mr. This assumption is not entirely reasonable since Mr. Fischer has estimated a reduction in manufacturing costs of $900,000 however this is not accounted for in the income statement. However this makes the forecast even more conservative.
3. Overheads are constant
He assumes the overheads to be 300 throughout the year, which seems to be reasonable as the production is constant during the year. Furthermore it is close to last years average of 296.
4. Selling and administrative expenses will be maintained at previous levels
This assumption is reasonable as there are no expected significant changes to this area of the business.
5. Not showing any interest expense
He is not accounting for interest expense in his pro-forma statement.
Assumptions (Balance Sheet)
6. Accounts Receivable
Assumption is okay since there is no reason to expect a change in customer behavior and sales are the same as the previous year
7. Investments in Plant increase by $3,000,000 during the first 2 months of the forecast.
This assumption is reasonable as it is predicated that the modernization project will be completed in August. No other investments are expected to be needed.
8. Accounts Payable, he assumes a 30-day payment period for and