90.2K

Verified Solution

Link Copied!

Background Information

Floors is a company that supplies flooring material to contractors. Their customers are the contractors who install carpet, tile, and wood flooring for new construction projects and for replacement in homes, apartments, offices, and other facilities that need new flooring. Floors receives their inventory from several manufacturers. They own a large warehouse to store the materials and to use as a showroom for their customers.

Floors is located in an average$-$size city. They currently own approximately $15\%$ of the market in the city. The construction market has been good, growing at about $5\%$ per year. It is projected that over the next couple of years it will continue to grow at $5\%.$ There are a total of $7$ flooring material suppliers in the city. That will increase to $8$ as a large, national company that sells discounted flooring has purchased a warehouse in the city and will start business on January $1$st$.$ Management is concerned on the impact on market share and sales growth, as well as on pricing to remain competitive.

Nationally and locally, the economy continues to grow at a strong pace. GDP has been in the $3\%$ range, and there is not anything to suggest that it won$$t continue on at the same pace. Inflation has been holding steady at $2\mathrm{.}5\%.$

With the strong economy, prices of raw material has been increasing, but for the most part only at the rate of inflation. The company that supplies your wood flooring, however, wants to discuss pricing as their costs have seen a significant jump with the increase in the price of lumber costs. That continues the trend you have seen in the past and believe that trend will continue.

Except for management, all employees are paid on an hourly basis.

Floors has four initiatives that will impact the company going forward, including their forecast over the next two years. These initiatives are as follows:

$1.$ Based on demand and rising costs, Floors will get out of the wood flooring portion of the business over the next several years. The impact is that demand for wood flooring will go down by $75\%$ in $2020$ and down to $$0$ in $2021.$ Prices for wood flooring will remain flat $($no change$)$ in $2020,$ but the cost will increase by $15\%$ in $2020.$ These changes should be reflected in the forecast.

$2.$ Management has put a new program into place which should reduce overtime pay by $25\%$ in $2020$ and remain the same amount in $2021$ as in $2020.$ This decrease should be reflected in the forecast.

$3.$ Management is working on a new inventory management system, as well as agreements with its suppliers. It is expected that inventory days will be reduced to $60$ days in $2020$ and $55$ days in $2021.$

$4.$ The company will move into a new warehouse on January $1,2020.$ The company has used debt to finance the warehouse.

Forecast $($Assignment$)$

Prepare a forecast of the Income Statement and Balance Sheet for the next two years $(2020$ and $2021).$ Complete the blue$-$shaded areas of the Floors Forecast spreadsheet. There is one section of Ratios to complete before completing the forecast. Use the Upside$-$down U methodology to complete the forecast $(1.$ Complete the historical ratios; $2.$ Complete the forecast ratios; $3.$ Complete the forecast financial statements$).$

Use the information above and the following information to assist in your forecast:

$$ Revenue and Cost of Goods Sold $-$ see Background Information. Specific assumptions have been given for wood flooring. Use the other background information to forecast Revenue and Cost of Goods Sold for Carpet and Tile. There is no specific right answer.

$$ Operating Expenses $$ for all expenses other than Overtime Pay and Depreciation, use the rate of inflation to forecast expenses based on $2019$ actual expenses. For Overtime Pay, see Background Information. For Depreciation expense, $2020$ and $2021$ expenses have already been calculated and are in the spreadsheet.

$$ Interest Expense $$ loan is at $7\mathrm{.}0\%$ per year.

$$ Tax Expense $$ Use the same tax rate used in $2019.$

$$ Balance Sheet

o Cash $$ Increase cash balance by $10\%$ each year.

o Days of Accounts Receivable $$ keep flat $($no change in $2020$ and $2021).$

o Inventory $$ see Background Information.

o Building and Equipment and Accumulated Depreciation $$ Building and Equipment and Accumulated Depreciation have already been calculated and are in the spreadsheet.

o Days of Accounts Payable $$ keep flat $($no change in $2020$ and $2021).$

o Taxes Payable $$ make equal to the Tax Expense for the Year.

o Stock $$ keep flat $($no change in $2020$ and $2021).$

o Retained Earnings $$ calculate each year based on previous Retained Earnings and Net Income. Assume no dividends.

o Long$-$Term Debt $$ Calculate to make the balance sheet balanced.

What is the demand $($in units of square feet$)$ of Wood Flooring in $2020($only input whole numbers$$for example, no decimals$)?$

Answer & Explanation Solved by verified expert

See Answer