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1.

Tables 1 through 5 contain the financial information describing the effects of level
production on inventory, cash flow, loan balances, and interest expense. Reproduce these
tables if Tim's suggestion were implemented; that is, change the Production This Month
column in Table 2 from 400 each month to 150, 75, 25, and so on, to match Sales in the
next column. Then recompute the remainder of Table 2, and Tables 3, 4, and 5 based on
the new production numbers. Beginning inventory is still 400 units. Beginning cash is
still $125,000 and that remains the minimum required balance.
This is done on the attached excel file.
2. Given that Gale Force is charged 12 percent annual interest (1 percent a month) on its
cumulative loan balance each month (Table 5), how much would Tim's suggestion save in
interest expense in a year?
The original interest amount is $254,250. With the new production, based on sales, the
interest amount comes to $50,750. Savings in interest is $203,500
3. Up until now, we have not considered any inefficiencies that have been introduced as a
result of going from level to seasonal production. Assume that there is an added expense
for each sales dollar of .5 percent (.005). Based on this fact and the information computed
in question 2, is seasonal production justified?
The additional expense comes to $72,000 and the total interest comes to $51,924 (due to
more borrowing due to additional expense). The total expense is $123,924. The original
interest amount was $254,250. Based on this, the seasonal production is justified.

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