What assumptions did Mr. Fischer make when he prepared the forecasts shown in case Exhibits 1 and 2? Were these assumptions reasonable?
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…show more content… Given the other assumptions the 30-day payment period is also achievable.
9. Raw Materials/ WiP/ are assumed to stay stable throughtout the year
Given that production is constant this assumption is correct to make.
Mr. Fischer made relatively conservative forecasts based on largely reasonable assumptions of seasonality, investment needed for PPE and continuing levels of sales. Based on the data at Mr. Fischer had in June 1995 it is difficult to criticize his projections.
Why does he need additional short term financing to support the additional sales peak? Isn`t he producing throughout the year at a stable rate-I would understand if he needs the money for add. NWC during the low sales period but not during the strong months when the inventory is going down.
Why was SureCut Shears unable to repay its bank loan by December 31, 1995 as originally forecasted?
SureCut was unable to repay its bank loan for two primary reasons, an overestimating of sales (drop in demand) a build up of capital in inventories (this was in part due to the seasonality of the business). SureCut has the policy of producing at a constant rate this meant that it has little flexibility to reduce inventories. The downturn caused a reduction in sales therefore SureCut no longer had the revenue from this but still needed to pay for in Raw Materials, Accounts payables, and production related costs.
Additionally the investment in PPE went over budget by