Tutorial 3 - Answer

CHAPTER 4
1.
CASTILLO PRODUCTS COMPANY
Note: Because Retained Earnings increased by only $40,000 and Net
Income was $75,000, Cash Dividends paid must have been
$35,000.
Parts A-D:
Statement of Cash Flows ($ Thousands)
2013
Cash from Operating Activities:
Net income
75
Depreciation
40
Increase in accounts receivable
-80
Increase in inventories
-100
Increase in accounts payable
30
Increase in accrued liabilities
20
Net from Operating Activities
-15
Cash from Investing Activities:
Increase in gross fixed assets
Net from Investing Activities
Cash from Financing Activities:
Increase in bank loan
Increase in long-term debt
Cash dividends paid
Net from Financing Activities
Total net cash increase (decrease)
Cash at beginning of period
Total net cash increase (decrease)
Cash at end of period

-90
-90

10
100
-35
75
-30
50
-30
20

Part E:
Operating activities (-15) + Investing activities (-90) = -105 (annual net cash burn)
Part F:
per
Monthly burn rate = annual burn/12
-8.75 month
Time to Out of Cash = Cash/Mthly
Burn
2.3 months

2.

CASTILLO PRODUCTS COMPANY

Part A:
Income Statements ($ Thousands)
Net sales
Less: Cost of goods sold
Gross profit
Less: Marketing
Less: General & Administrative
Less: Depreciation
EBIT
Less: Interest
Income before taxes
Less: Income taxes
Net income

2012
900
540
360
90
250
40
-20
45
-65
0
-65

2013
1500
900
600
150
250
40
160
60
100
25
75

Part B:
Cash Fixed Costs:
General & Administrative
Interest Expenses
Total Cash Fixed Costs

250
45
295

Variable Expenses:
Cost of Goods Sold
Marketing
Total Operating Variable Expenses

60.0% of NS
10.0% of NS
70.0% of NS

% of Net Sales:
2012
2013
100.0% 100.0%
60.0%
60.0%
40.0%
40.0%
10.0%
10.0%
27.8%
16.7%
4.4%
2.7%
-2.2%
10.7%
5.0%
4.0%
-7.2%
6.7%
0.0%
1.7%
-7.2%
5.0%

EBDAT Breakeven (interest = 45):

(250 + 45)/(1 - .7) =

983.333

Part C:
EBDAT Breakeven (interest = 60):

(250 + 60)/(1 - .7) = 1033.333

3.
SALZA TECHNOLOGY CORPORATION
Part A:
Statement of Cash Flows
Cash from Operating Activities:
Net income
Depreciation
Increase in accounts receivable
Increase in inventories
Increase in accounts payable
Increase in accrued liabilities
Net from Operating Activities
Cash from Investing Activities:
Increase in gross fixed assets
Net from Investing Activities
Cash from Financing Activities:
Increase in bank loan
Increase in common stock
Cash dividends paid
Net from Financing Activities
Total net cash increase (decrease)
Cash at beginning of period
Total net cash increase (decrease)
Cash at end of period

2013
70
30
-30
-53
15
13
45

-90
-90

7
35
-20
22
-23
39
-23
16

Part B:
Net cash flow from operating activities was a positive 45
Net cash flow from investing activities was a negative 90
Net cash flow from financing activities was a positive 22
The result was a decline in cash of 23 from 39 to 16
Part C:
Operating activities (45) + Investing activities (-90) = -45 (annual net cash burn)
Part D:
Monthly burn rate = annual burn/12
-3.75 per month
Time to Out of Cash = Cash/Mthly Burn
4.3 months

4.
Variable costs: Cost of goods sold/Net sales = 270/450 = 60.0%
Fixed costs: Operating expenses (46) and interest (4) = 50
EBDAT breakeven = 50/(1 - .60) = 50/.40 = 125 survival revenues (SR)
5.
Projected variable cost ratio: 65.0%
Fixed costs: Operating expenses (46) and interest (4) = 50
EBDAT breakeven = 50/(1 - .65) = 50/.35 = 142.86 survival revenues (SR)

Refer to Problems 4 and 5 in the chapter involving the Salza Technology Corporation (see
Problem 3 for the firms financial statements).
A.

Variable costs: Cost of goods sold/Net sales = 270/450 = 60.0%

TOFC = operating expenses (46) and depreciation (30) = 76
NOPAT breakeven = 76/(1 - .60) = 76/.40 = 190 NOPAT revenues (NR)
B.
Projected variable cost ratio: 65.0%
TOFC = operating expenses (46) and depreciation (30) = 76
NOPAT breakeven = 76/(1 - .65) = 76/.35 = 217.14 NOPAT revenues (NR)