Ronil John Garganian MBAT1

Geraldine Alisbo MBAT1

CASE ANALYSIS: BROWNING MANUFACTURING COMPANY

I. Background

The management of Browning Manufacturing Company annually prepares a

budget of expected financial operations for the ensuing calendar year. Provided is
the Projected Balance Sheets, Income Statements & Statement of Cost of Goods
Sold for 2009 and the expected transactions for 2010 be used as basis for
preparation of 2010 budget.

II. Analysis

1. Given the 2009 Statements of Financial Position, Performance and Cost of

Goods Sold together with the projected transactions for 2010, below is the 2010
forecasted Balance Sheet, Income Statement and Statement of Cost of Goods
Sold as well as the corresponding T-accounts.

A. Projected Statement of Cost of Goods Sold

Browning Manufacturing Company

Projected Statement of Cost of Goods Sold
For the Year ended, December 31, 2010

Direct Materials Used

Raw Materials, 1/1/2010 $ 110,520.00
Add: Net Cost of Purchases 825,000.00
Raw Materials Available for Use 935,520.00
Less: Raw Materials, 12/31/2010 (124,520.00) $ 811,000.00
Direct Labor 492,000.00
Factory Overhead
Indirect Labor $ 198,000.00
Power, Heat and Light 135,600.00
Plant Depreciation 140,400.00
Social Security Taxes 49,200.00
Factory Taxes and Insurance 52,800.00
Supplies 61,200.00 637,200.00
Total Manufacturing Cost $ 1,940,200.00
Add: Work-in-Process Inventory, 1/1/2010 172,200.00
Total Cost of Goods Available for Use $ 2,112,400.00
Less: Work-in-Process Inventory, 12/31/2010 (210,448.00)
Total Cost of Goods Manufactured $ 1,901,952.00
Add: Finished Goods Inventory, 1/1/2010 257,040.00
Total Goods Available for Sale $ 2,158,992.00
Less: Finished Goods Inventory, 12/31/2010 (352,368.00)
Cost of Goods Sold $ 1,806,624.00
B. Projected Income Statement

Browning Manufacturing Company

Projected Income Statement
For the Year ended, December 31, 2010

Sales $ 2,562,000.00
Less: Sales Returns and Allowances $ 19,200.00
Sales Discounts 49,200.00 (68,400.00)
Net Sales $ 2,493,600.00
Less: Cost of Good Sold (1,806,624.00)
Gross Profit $ 686,976.00
Less: Selling and Administrative Expenses (522,000.00)
Operating Income $ 164,976.00
Less: Interest Expense (38,400.00)
Income before Tax $ 126,576.00
Less: Estimated Income Tax Expense (58,000.00)
Net Income $ 68,576.00

C. Projected Balance Sheet

Browning Manufacturing Company

Projected Balance Sheet
December 31, 2010

ASSETS
Current Assets
Cash and marketable securities $ 495,840.00
Accounts Receivable (net of allowance for doubtful accounts) 201,360.00
Inventory
Materals $ 124,520.00
Work in Process 210,448.00
Finished Goods 352,368.00
Supplies 22,080.00 709,416.00
Prepaid Taxes and Insurance 91,920.00
Total Current Assets $ 1,498,536.00
Non-current Assets
Property, Plant and Equipment 2,822,400.00
Less: Accummulated Depreciation (1,047,600.00) 1,774,800.00
TOTAL ASSETS $ 3,273,336.00

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts Payable $ 288,360.00
Notes Payable 552,840.00
Income Taxes Payable 58,000.00 $ 899,200.00

Shareholders' Equity
Capital Stock $ 1,512,000.00
Retained Earnings 862,136.00 2,374,136.00
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,273,336.00
D. T-Accounts

Cash Accounts Receivable Work-in-Process Inventory

118,440.00 144,000.00 311,760.00 2,604,000.00 172,200.00 1,901,952.00
264,000.00 78,000.00 2,562,000.00 19,200.00 811,000.00
2,604,000.00 492,000.00 49,200.00 1,129,200.00
198,000.00 2,873,760.00 2,672,400.00 2,112,400.00 1,901,952.00
49,200.00 201,360.00 210,448.00
135,600.00
522,000.00
38,400.00 Materials Finished Goods Inventory
788,400.00 110,520.00 811,000.00 257,040.00 1,806,624.00
9,000.00 825,000.00 1,901,952.00
36,000.00
2,986,440.00 2,490,600.00 935,520.00 811,000.00 2,158,992.00 1,806,624.00
495,840.00 124,520.00 352,368.00

Direct Labor Property, Plant & Equipment Accumulated Depreciation

492,000.00 2,678,400.00 907,200.00
144,000.00 140,400.00

492,000.00 2,822,400.00 1,047,600.00

492,000.00 2,822,400.00 1,047,600.00

Indirect Labor Power, Heat, & Light Social Security Taxes

198,000.00 135,600.00 49,200.00

198,000.00 135,600.00 49,200.00

198,000.00 135,600.00 49,200.00

Prepaid Taxes & Insurance Supplies Depreciation Expense

66,720.00 52,800.00 17,280.00 61,200.00 140,400.00
78,000.00 66,000.00

144,720.00 52,800.00 83,280.00 61,200.00 140,400.00

91,920.00 22,080.00 140,400.00

Accounts Payable Notes Payable Income Taxes Payable

788,400.00 185,760.00 288,840.00 9,000.00 9,000.00
825,000.00 264,000.00 58,000.00
66,000.00
788,400.00 1,076,760.00 552,840.00 9,000.00 67,000.00
288,360.00 552,840.00 58,000.00

Capital Stock Retained Earnings

1,512,000.00 19,200.00 829,560.00
49,200.00 2,562,000.00
522,000.00
1,512,000.00 1,806,624.00
1,512,000.00 38,400.00
58,000.00
36,000.00
2,529,424.00 3,391,560.00
862,136.00
 Sales Sales Returns & Allowances Sales Discounts
2,562,000.00 19,200.00 49,200.00

2,562,000.00 19,200.00 49,200.00

2,562,000.00 19,200.00 49,200.00

COGS Selling & Admin Expense Interest Expense

1,806,624.00 522,000.00 38,400.00

1,806,624.00 522,000.00 38,400.00

1,806,624.00 522,000.00 38,400.00

2. As regards financial performance, Browning Manufacturing Company projected

an increase of Sales by 2010 (see exhibit A). Relevant to the increase in
revenue is the corresponding increases of the company’s variable expenses.
Production costs (COGM) as detailed below (exhibit B) reveals a significant
increase versus the preceding year. Further, the forecasted increase in
production will not be equally meet with sales efforts as inventory levels,
particularly finished goods, reports a higher ending balance as compared to
last year which may entail additional warehousing cost hence the equivalent
increase in Selling and Administrative Expenses. Though sales revenue is
expected to be 12% higher than 2009, bottom line results a decrease of 35%.

Exhibit A:
Difference
GL Accounts 12/31/2009 12/31/2010 % +/(-)
Inc (Dec)
Sales 2,295,600.00 2,562,000.00 266,400.00 12%
COGS 1,568,280.00 1,806,624.00 238,344.00 15%
Selling and Admin Expense 437,160.00 522,000.00 84,840.00 19%
Net Income 105,000.00 68,576.00 (36,424.00) -35%

Exhibit B:
Difference
GL Accounts 12/31/2009 12/31/2010 % +/(-)
Inc (Dec)
Materials 110,520.00 124,520.00 14,000.00 13%
Work-in-Process Inventory 172,200.00 210,448.00 38,248.00 22%
Finished Goods Inventory 257,040.00 352,368.00 95,328.00 37%
Factory Overhead 559,320.00 637,200.00 77,880.00 14%
COGM 1,607,040.00 2,158,992.00 551,952.00 34%

3. Management forecasted budget will not achieve the repayment goal for note
payable while maintaining the desired balance for its cash. Projection reveals
that cash per December 31, 2010, balance will be short of $54,160.00 after the
plan of paying the $400,000.00 notes payable. On a minimum it is suggested
that the management may reduce its finished goods inventory ending balance
to 30% by adding additional cash sales target. The additional cash sales may
cope to the corresponding balance needed to attain the target cash balance.
(See computation in the succeeding page).
 Suggestion: Sale of 70% worth of FG
70% of Finished Goods 246,657.60
Applicable COGS (71% of Gross Sales) 175,126.90
Gross Profit 71,530.70
The 29% Gross Profit would still allow for charges on sales discounts, returns,
and allowances, selling and admin expenses and the corresponding applicable
income taxes.

4. Inventory turnover for 2010 budget period is lower versus 2009 hence target
turnover goal is not achievable. Inventory turnover ratio measures the number
of times inventory is sold for in a certain period. In this case, a lower turnover
may mean lower sales.

Referring to our suggestion in the prior requirement, an increase in cash sales

target will also result a better inventory turnover outcome. However, to ensure
salability, Browning management may offer minimal discounts on top of the
existing discount scheme provided within the ambit of the allowable expenses
for incurrence in the gross profit.

5. The budget indicates that the company may not be able to pay its obligation as
they fall due leading to a negative impact on credit score which in turn may
affect the company’s credit plans should it be needing additional capitalization
in the future.