Question

Lear Inc. has $1,030,000 in current assets, $465,000 of which are considered permanent current assets. In addition, the firm has $830,000 invested in fixed assets.    
  
a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 9 percent. The balance will be financed with short-term financing, which currently costs 6 percent. Lear’s earnings before interest and taxes are $430,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 40 percent.

Earnings after tax-  

     

b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $430,000. What will be Lear’s earnings after taxes? The tax rate is 40 percent.
  

Earnings after tax-  

2.

Antonio Banderos & Scarves makes headwear that is very popular in the fall-winter season. Units sold are anticipated as:

Monthly Unit Sales
October	1,800
November	2,800
December	5,600
January	4,600
	14,800	Total units sold

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup.

However, Antonio decides to go with level production to avoid being out of merchandise. He will produce the 14,800 items over four months at a level of 3,700 per month.

a. What is the ending inventory at the end of each month? Compare the unit sales to the units produced and keep a running total.

  

Antonio Banderos & Scarves makes headwear that is very popular in the fall-winter season. Units sold are anticipated as:

Monthly Unit Sales
October	1,800
November	2,800
December	5,600
January	4,600
	14,800	Total units sold

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup.

However, Antonio decides to go with level production to avoid being out of merchandise. He will produce the 14,800 items over four months at a level of 3,700 per month.

a. What is the ending inventory at the end of each month? Compare the unit sales to the units produced and keep a running total.

  

	Ending Inventory October units November units December units January units

b. If the inventory costs $6 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 1 percent as the monthly rate.)

  

	Inventory Financing Cost October $ November December January Total financing cost $

Answer 1