Business decision case A Candy”s Shirts, Inc., has an opportunity to purchase 40,000 shirts with the logo of her favorite school in January 2009. Candy, who is not currently in business, is considering buying these shirts and then renting a display cart from which to sell these shirts (called a kiosk) in a shopping mall. Based on the following information and estimates, Candy needs to decide if the business would be profitable:
Cost of the 40,000 shirts, all of which must be purchased in January 2009, is USD 440,000.
Candy thinks it would take two years to sell all of the shirts. She estimates her sales at 25,000shirts in 2009 and 15,000 shirts in 2010.
Rent of the kiosk would be USD 1,500 per month in 2009 and USD 1,600 per month in 2010.
Candy can buy some counters on which to display the merchandise for USD 4,000. She could sell the counters for USD 500 at the end of the second year.
Candy estimates the cost to decorate her kiosk would be USD 2,500.
Candy would hire employees and pay them USD 1 per shirt sold.
Candy plans to sell the shirts for USD 17 each.
Candy and her husband purchased USD 100,000 of capital stock in the business. Therefore, she plans to borrow USD 400,000 from their family banker. Interest expense on this loan will be USD 52,000 in 2009 and USD 6,500 in 2010. Candy plans to repay USD 300,000 on 2010 January 2, and the remaining USD 100,000 on 2010 July 1
Candy needs to rent some storage space because all 40,000 shirts cannot be stored at the kiosk. Storage space costs USD 2,500 per year.
a. Prepare estimated income statements for 2009 and 2010 for Candy”s business. Does it appear that the business will be profitable?
b. Will Candy have the cash available to pay the bank loan as she planned?
Business decision case B In the Annual report appendix, refer to the consolidated statements of earnings for The Limited”s most recent three years. Calculate the gross margin percentage and write an explanation of what the results mean for each of the three years. Annual report analysis C Refer to the consolidated statements of income of The Limited in the Annual report appendix. Identify the 2000, 1999, and 1998 net sales; cost of goods sold; gross profit; selling, administrative, and general expenses; and operating income. Do the results present a favorable trend? Comment on the results.