Merrill Electronics Corp.

Case Study
GROUP 14

Asri Zefanya - 2567340

Vira Cania Arman - 2591630
Aldi Nandi Wardhana - 2595492

Advance Corporate Financial Management

2016
Introduction
In 1950, Merrill Electronics Corp has become a major supplier for Global Electrical Company, and
continues growing until 1980 the company expand their business by distributing various products
from manufacturing companies such as Goldstone Corporation Taiwan and Fuji Electronics.
After the death of the founder, Thomas Merrill in January 1989, the company was managed by his
daughter, Patricia Merrill. During the reign, a new objectives and decision was made. Regarding to
her new ambitious growth target, she realized that she needs help to achieve them due to her lack of
experiences. Therefore, she began to recruited a new operating manager, Charles Brown.
During the first semester 1991, Merrill Electronics Corp had a significant improved in sales, but it was
beyond their capacity and anticipation. The company started to have an incapability to pay the
suppliers as well as the $3,000,000 credit to the bank. Besides, the suppliers have sent a reminder to
Merrill Electronics Corp about the credit terms which is net 30 days. In this particular situation, several
options need to be considered to overcome this financial condition.

Key Core Problems

Charles Brown, the new hired manager tries to implement a new strategy to increase sales by turning
Merrill into volume business. However, Merrills unreadiness for the strategy, leads to overtrade,
when the increase of its sales is greater than their working capital.

Analysis (Current Condition)

Charles Brown started to implement the strategy in the first semester 1991 which resulted in volume
increase as it was predicted. Even though, the improve number of sales leads to difficulty for Merrill
Electronics when meeting payments to supplier in addition to maintaining the credit lines with its
banks.
Consequently, in March and June 1991, Merrill and Brown approached the bank to negotiate their
credit limit. The request was turned down. However, the bank would give an extra time until the end
of December 1991, provided that the company have a rational working plan which the company cash
flow would stable within the $3,000,000 credit limit throughout the second semester and cut down
the total credit lines used to less than $500,000 by 31 December 1991. Companys current condition,
without additional financing can be seen in Exhibit 1.

Recommendations
There are several actions that can be taken by Merrill Electronics in order to be survived in the
business; seeing Merrill Electronics has difficulties to meet the suppliers payment, they can consider
to use invoice discounting method (Exhibit 2).

GROUP 14 1
Furthermore, a gentle approach needs to be done, such as negotiate the terms of payments with the
suppliers to suit with the current companys financial condition. Another prominent action could be
addressed by divesting the line of business which is less profitable, and had slow movements, such
as TV, VCRs, Small Appliances, and white goods. Instead, they should focus on the more profitable
business such as PC, Hi Fi and Electronics in order to operate the business efficiently in terms of
operating cost. It is advisable for the company to make an adjustment towards their stocking policy,
so the opportunity of stock outs while dealing with unexpected demands could be minimized. In the
end, if all strategies that have been implemented are unsuccessful to keep the business in the long-
run, Patricia Merrill should consider selling the company for cut loss.

Assumptions
In order to meet a realistic working plan, a number of assumptions were made for this case:
Gross Margin percentage same as June 1991 actual.

All operating expenses are fixed expense except after sales service which is percentage of the
last month sales. For July 1991, the average of total sales from last period to be used.
All AP is paid timely, no interest rate come from Account Payable.
Interest rate is only for LTD and STD.
Cost of invoice discounting is 5% of total invoice discounted.
Terms of Payment 30 days and 93% is paid timely.
No addition in Assets throughout the year (CAPEX=0).
Loan Paid Timely and Short Term Loan is 1 Year maturity.
LTD installment is 40,000/semester.
All account receivables are received even though they are aging, no bad debt expense.
For balance sheet forecasting, Account Payable is treated equally (no difference between foreign
& domestic).
Goods ordered from supplier 2 months before the forecasted sales.
There is no additional cost of goods (distribution, etc) except from the suppliers.
Numbers of goods ordered for May & June 1992 is same as previous year.
Goods ordered from supplier 2 months before the forecasted sales, the number of goods
ordered 50% of sales forecasted

GROUP 14 2
Exhibit
Exhibit 1
Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92
Beginning Cash Balance 35,220 672,192 (1,203,036) (6,843,200) (7,283,300) (4,648,700) (1,268,396) 658,087 228,218 266,268 1,439,191 2,383,347
Cash from Sales 3,874,547 2,527,248 2,771,533 3,942,351 5,489,312 6,727,935 5,214,318 3,110,413 3,659,600 4,076,900 4,341,661 4,375,912
Total Cash Available 3,909,767 3,199,440 1,568,497 (2,900,849) (1,793,988) 2,079,235 3,945,921 3,768,500 3,887,818 4,343,168 5,780,852 6,759,259

Cash Disbursement
Direct Selling 110,900 110,900 110,900 110,900 110,900 110,900 110,900 110,900 110,900 110,900 110,900 110,900
Advertising 34,200 34,200 34,200 34,200 34,200 34,200 34,200 34,200 34,200 34,200 34,200 34,200
After Sales Service 94,467 88,484 138,898 193,658 237,813 182,184 105,173 124,991 141,332 151,588 152,979 118,211
Warehouse and Shipping 39,400 39,400 39,400 39,400 39,400 39,400 39,400 39,400 39,400 39,400 39,400 39,400
General Administration 101,353 101,353 101,353 101,353 101,353 101,353 101,353 101,353 101,353 101,353 101,353 101,353
Tax 27,138 42,531 91,331 155,772 210,901 140,543 50,860 80,083 110,939 129,146 128,555 93,481
Account Payable 2,830,118 3,985,608 4,910,616 3,747,169 2,120,145 2,525,802 2,845,949 3,049,355 3,083,427 2,337,390 2,830,118 2,830,118
Total Cash Disbursement 3,237,575 4,402,476 5,426,698 4,382,451 2,854,712 3,134,381 3,287,834 3,540,281 3,621,550 2,903,977 3,397,504 3,327,663

FInancing
New Loan
Long Term Loan Repayment (40,000) (40,000)
Short Term Loan Repayment (2,985,000)
Interest 0 0 0 0 0 (173,250) 0 0 0 0 0 (20,000)
Total Financing 0 0 (2,985,000) 0 0 (213,250) 0 0 0 0 0 (60,000)

Cash Surplus (Deficit) 672,192 (1,203,036) (6,843,200) (7,283,300) (4,648,700) (1,268,396) 658,087 228,218 266,268 1,439,191 2,383,347 3,371,597

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Exhibit 2
Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92
Beginning Cash Balance 35,220 2,901,580 2,461,842 896,686 203,139 555,715 2,166,676 1,413,306 186,843 258,964 685,851 1,622,735
Cash from Sales 3,874,547 527,248 371,533 1,242,351 1,689,312 1,327,935 714,318 3,110,413 3,659,600 4,076,900 4,341,661 4,375,912
Cash from Invoice Discounting 2,000,000 2,400,000 2,700,000 3,800,000 5,400,000 4,500,000
Total Cash Available 5,909,767 5,828,828 5,533,375 5,939,037 7,292,451 6,383,650 2,880,993 4,523,718 3,846,443 4,335,864 5,027,512 5,998,647

Cash Disbursement
Direct Selling 110,900 110,900 110,900 110,900 110,900 110,900 110,900 110,900 110,900 110,900 110,900 110,900
Advertising 34,200 34,200 34,200 34,200 34,200 34,200 34,200 34,200 34,200 34,200 34,200 34,200
After Sales Service 94,467 88,484 138,898 193,658 237,813 182,184 105,173 124,991 141,332 151,588 152,979 118,211
Warehouse and Shipping 39,400 39,400 39,400 39,400 39,400 39,400 39,400 39,400 39,400 39,400 39,400 39,400
General Administration 101,353 101,353 101,353 101,353 101,353 101,353 101,353 101,353 101,353 101,353 101,353 101,353
Tax 27,138 42,531 91,331 155,772 210,901 140,543 50,860 80,083 110,939 129,146 128,555 93,481
Account Payable 2,600,730 2,830,118 3,985,608 4,910,616 3,747,169 2,120,145 2,525,802 2,845,949 3,049,355 3,083,427 2,337,390 2,830,118
Cash Dividend 50,000
Invoice Discounting Cost 120,000 135,000 190,000 270,000 225,000 0
Total Cash Disbursement 3,008,187 3,366,986 4,636,689 5,735,898 4,751,736 3,003,725 2,967,687 3,336,875 3,587,479 3,650,013 2,904,776 3,327,663

FInancing
New Loan 1,500,000
Long Term Loan Repayment (40,000) (40,000)
Short Term Loan Repayment (1,985,000) (1,000,000) (1,000,000) (500,000)
Interest 0 0 0 0 0 (173,250) 0 0 0 0 0 (20,000)
Equity
Total Financing 0 0 0 0 (1,985,000) (1,213,250) 1,500,000 (1,000,000) 0 0 (500,000) (60,000)

Cash Surplus (Deficit) 2,901,580 2,461,842 896,686 203,139 555,715 2,166,676 1,413,306 186,843 258,964 685,851 1,622,735 2,610,985
Exhibit 3

30-Jun-91 31-Jul-91 31-Aug-91 30-Sep-91 31-Oct-91 30-Nov-91 31-Dec-91 31-Jan-92 29-Feb-92 31-Mar-92 30-Apr-92 31-May-92 30-Jun-92
Assets

Current Assets
Cash & Banks 35,220 2,901,580 2,461,842 896,686 203,139 555,715 2,166,676 1,413,306 186,843 258,964 685,851 1,622,735 2,610,985
Account Receivable (net) 4,166,180 291,633 559,385 1,782,851 3,410,500 3,410,500 4,761,189 3,273,254 1,083,936 1,568,524 1,973,924 2,257,024 2,315,363
Inventories 5,591,470 8,774,529 10,587,687 13,169,868 12,182,802 9,918,304 5,297,852 9,525,389 5,969,276 8,101,537 6,524,033 5,165,870 3,947,518
Other Curent Assets 65,980 65,980 65,980 65,980 65,980 65,980 65,980 65,980 65,980 65,980 65,980 65,980 65,980
Total Current Assets 9,858,850 12,033,721 13,674,894 15,915,385 15,862,422 13,950,500 12,291,696 14,277,928 7,306,035 9,995,005 9,249,788 9,111,610 8,939,845

Fixed Assets
Buildings & Equipment (nett) 789,750 777,008 764,267 751,525 738,783 726,042 713,300 700,558 687,817 675,075 662,333 649,592 636,850
Goodwill 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000
Total Fixed Assets 889,750 877,008 864,267 851,525 838,783 826,042 813,300 800,558 787,817 775,075 762,333 749,592 736,850
Total Assets 10,748,600 12,910,730 14,539,160 16,766,910 16,701,205 14,776,541 13,104,996 15,078,487 8,093,852 10,770,080 10,012,121 9,861,201 9,676,695
Capital & Liabilities

Current Liabilities
Short-term bank loans 2,985,000 2,985,000 2,985,000 2,985,000 2,985,000 1,000,000 0 1,500,000 500,000 500,000 500,000 0 0
LT debt due in one year 80,000 80,000 80000
Accounts Payable (domestic) 1,705,110 2,830,118 3,985,608 4,910,616 3,747,169 2,120,145 2,525,802 2,845,949 3,049,355 3,083,427 2,337,390 2,830,118 2,830,118
Accounts Payable (foreign) 895,620
Accrued Expenses 251,720 264,462 277,203 289,945 302,687 315,428 328,170 340,912 353,653 366,395 379,137 391,878 404,620
Total Current Liabilities 5,917,450 6,079,580 7,247,811 8,185,561 7,034,856 3,435,574 2,933,972 4,686,860 3,903,008 3,949,822 3,216,527 3,221,996 3,314,738

Long-term debt 480,000 480,000 480,000 480,000 480,000 480,000 440,000 440000 440000 440000 440000 440000 400000
Capital Stock 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Retained Earnings 3,351,150 3,351,150 3,351,150 3,351,150 3,351,150 3,351,150 3,351,150 3,351,150 3,351,150 3,351,150 3,351,150 3,351,150 3,351,150
Owner's equity 4,831,150 4,831,150 4,831,150 4,831,150 4,831,150 4,831,150 4,791,150 4,791,150 4,791,150 4,791,150 4,791,150 4,791,150 4,751,150

Total capital & liabilities 10,748,600 10,910,730 12,078,961 13,016,711 11,866,006 8,266,724 7,725,122 9,478,010 8,694,158 8,740,972 8,007,677 8,013,146 8,065,888
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