SureCut Shears Case Write-up
The issues presented in this case are mainly due to incorrect assumptions about the market for sales in 1995 and the subsequent retail downturn that followed. More specifically, Mr. Fischer (CEO of SureCut Shears) assumed sales and demand in 1996 would be consistent with the prior year. However, as noted in the actual financial statements for 1996, inventories grew, reflecting that demand for its products was not as anticipated beforehand. In addition, sales declined due to the retailing recession occurring during the first half of 1996. Mr. Fischer also believed that his “peak” season for revenues would take place in September of 1995, resulting in increased purchases in that month. Nevertheless, as he soon finds out, he over-purchased and realizes sales were not as good as predicted. This incorrect estimation caused the firm to take on significant debt, in the form of bank loans payable, without sufficient income to cover it.
SureCut Shears’ inability to pay off its outstanding bank loan in March 1996 can be attributed to several reasons. Namely, Mr. Fischer’s ever-increasing debt stemming from bank loans over the past few months makes it difficult for him to pay off the amount owed during that term. Additionally, given its unfortunate cash position from its retail recession, he realistically couldn’t have used this as a way to pay off his surmounting bank debt. Finally, he incorrectly assumed that the modernization plant program worth $6 million total was made at the correct time. This is because, as a result of the consequently declining sales, SureCut Shears ultimately further pushed itself into a deeper hole due to this particularly untimely growth opportunity.
Needless to say, SureCut Shears financial position is rather concerning. In particular, the plant modernization problem, as estimated by Mr. Fischer, was expected to save $900,000 per year in manufacturing costs. However, looking at the actual...
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