Problems I. Southwest Trading Company, Taos, New Mexico. Summer is approaching v
ID: 2783760 • Letter: P
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Problems I. Southwest Trading Company, Taos, New Mexico. Summer is approaching ven and Sue Mahan have finally decided that their idea of a successtul furniture, art, and jewelry trading company has come of age. They know and Ste- ern that sum mer is a popular tourist time in New Mexico and could be the best time to start this business. The Mahans have had a long-time interest in Southwestern art and teven graduated from college with an economics degree about 15 years new ago and received his MBA in finance a few years later. He has been working in Dal las, Texas, as the controller of a major wholesale distributor company for many years His wife, Sue, who will be a full partner in the business, spent the first 10 years of her career in retail sales. Over the last several years, she has assumed more administrative duties for the group she works with. Steven and Sue know they bring the expertise and skill to run a succesful busi ness, but to ensure success they have been researching the market for over five years They also know that they must be very careful and thoroughly research the business and industry they are pursuing. They have traveled extensively to New Mexico and have spent a good deal of They have found that there is time getting to kno and elsewhere in the Southwest, and prices are high. Through their contacts with the local craftspeople, they have found that many of them would like a reliable source for displaying and selling their goods. They have been able to, make tentative arrangements with a large and dependable group to supply the furniture and art pieces they will need to run the business. The Mahans have decided to open a shop called Southwest Trading Company in Taos, New Mexico, and act as both a retailer and a supplier to furniture and art out lets in Texas. Steven's extensive contacts with businesses in Dallas and Houston have given him the orders needed to make the business a success as soon as they begin shipping the goods. Sue has already begun marketing the Southwest Trading Com arrangements wI people will allow very aggressive pricing of the goods to retail establishments in Texas. This aggressive pricing has been well received, and tentative orders are already Steven has found an ideal location in Taos that is currently available. The owner is asking $275,000 for the space, but Southwest Trading has a contract, contingent on financing, for $250,000. Steven and Sue have gotten bids on remodeling and should in place. be able to renovate the space for about $45.000. Although they will purchase the building, the land is leased on a transferable lease with 65 years remaining. The into the venture. Sue's sister is also interested in the possibilities that the com exhibits and is lending Southwest Trading $90,000. Repayment on the note to Sue's Mahan's have decided to invest $235,000, which represents most of their saving panyExplanation / Answer
Proforma Statement of Profit and Loss account for 5 years Period 6 months 12 months 12 months 12 months 12 months Year 2014 2015 2016 2017 2018 Sales 275000 675000 800000 900000 900000 COGS 63% 173250 425250 504000 567000 567000 Contribution 101750 249750 296000 333000 333000 General & Adminsitrative expense 70000 100000 120000 120000 120000 Marketing Cost 30000 Selling expense 12% 33000 81000 96000 108000 108000 -31250 68750 80000 105000 105000 Depreciation 29500 14750 29500 29500 29500 29500 PBT -46000 39250 50500 75500 75500 Tax 34% 0 0 14875 25670 25670 Profit after Tax -46000 39250 35625 49830 49830 Workign Note 1 Workign Note 2 Initial Capital 295000 Days Working Capital 150000 Accounts receivables days 48 Total Funds Required 445000 Accounts payable days 28 Less: Contribution from Partners 325000 Inventory Turnover 3 Loan requirement from Bank 120000 Proforma Balance Sheet as on December 31, Liabilities Day 0 2014 2015 2016 2017 2018 Capital 3,25,000 3,25,000 3,25,000 3,25,000 3,25,000 3,25,000 Loan from Bank 1,20,000 2,04,125 1,76,375 1,52,708 1,06,545 27,215 Payables - 6,188 15,188 18,000 20,250 20,250 Reserves - -46,000 -6,750 28,875 78,705 1,28,535 Total Liabilities 4,45,000 4,89,313 5,09,813 5,24,583 5,30,500 5,01,000 Assets Assets 2,95,000 2,80,250 2,50,750 2,21,250 1,91,750 1,62,250 Inventory 1,30,000 1,83,333 2,25,000 2,66,667 3,00,000 3,00,000 Receivables - 5,729 14,063 16,667 18,750 18,750 Cash 20,000 20,000 20,000 20,000 20,000 20,000 Total Assets 4,45,000 4,89,313 5,09,813 5,24,583 5,30,500 5,01,000 Check TRUE TRUE TRUE TRUE TRUE TRUE Day 0 6 months 12 months 12 months 12 months 12 months 2014 2014 2015 2016 2017 2018 Inventory 130000 1,83,333 2,25,000 2,66,667 3,00,000 3,00,000 Receivables 5,729 14,063 16,667 18,750 18,750 Payables 6187.5 15187.5 18000 20250 20250 WC 130000 1,82,875 2,23,875 2,65,333 2,98,500 2,98,500 Day 0 6 months 12 months 12 months 12 months 12 months Cash Flow Statement 2014 2014 2015 2016 2017 2018 Net Profit -46000 39250 35625 49830 49830 Less: Change in WC -52,875 -41,000 -41,458 -33,167 - Add: Depreciation 14,750 29,500 29,500 29,500 29,500 Equity Infusion 325000 Loan Requirement 120000 84,125 -27,750 -23,667 -46,163 -79,330 Purchase of Building -295000 Investment in WC -130000 Opening Bal 0 20,000 20,000 20,000 20,000 20,000 Closing Bal 20,000 20,000 20,000 20,000 20,000 20,000 Loan Requirement from Bank Amount Year 0 120000 Year 1 84,125 Repayment Schedule Year 3 27,750 Year 4 23,667 Year 5 46,163 Year 6 79,330 Balance O/s 27,215
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