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- Mini Case Chapter 13
- Donna Jamison, a recent UNC graduate with four years of for-profit health management experience, was recently brought in as assistant to the chairman of the board of Computron Diagnostics, a manufacturer of clinical diagnostic equipment. The company had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Computron’s results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president and vice president plus its major stockholders (who were all local business people), was most upset when directors learned how the expansion
- was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the cut off credit. As a result, Al Watkins, Computron’s president, was informed that changes would have to be made, and quickly, or he would be fired. Also, at the board’s insistence, Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was Computron’s chairman and largest stockholder. Campo agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison’s assistance.
- Jamison began by gathering financial statements and other data, shown below. The data show the dire situation that Computron Diagnostics was in after the expansion program. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in Year 2, rather than the expected profit. Jamison examined monthly data for Year 2 (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly
- data. Also, it appears to be taking longer for the advertising program to get the message across, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than Computron’s managers had anticipated. For these reasons, Jamison and Campo see hope for the company—provided it can survive in the short run. Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken.
- Computron Diagnostics
- Statement of Operations
- Yr 1 Actual Yr 2 Actual Yr 3 Projected
- Revenue:
- Net patient service revenue $3,432,000 $5,834,400 $7,035,600
- Other revenue $0 $0 $0
- Total revenues $3,432,000 $5,834,400 $7,035,600
- Expenses:
- Salaries and benefits $2,864,000 $4,980,000 $5,800,000
- Supplies $240,000 $620,000 $512,960
- Insurance and other $50,000 $50,000 $50,000
- Drugs $50,000 $50,000 $50,000
- Depreciation $18,900 $116,960 $120,000
- Interest $62,500 $176,000 $80,000
- Total expenses $3,285,400 $5,992,960 $6,612,960
- Operating income $146,600 -$158,560 $422,640
- Provision for income taxes $58,640 -$63,424 $169,056
- Net income $87,960 -$95,136 $253,584
- Computron Diagnostics
- Balance Sheet
- Yr 1 Actual Yr 2 Actual Yr 3 Projected
- Assets
- Current assets:
- Cash $9,000 $7,282 $14,000
- Marketable securities $48,600 $20,000 $71,632
- Net accounts receivable $351,200 $632,160 $878,000
- Inventories $715,200 $1,287,360 $1,716,480
- Total current assets $1,124,000 $1,946,802 $2,680,112
- Property and equipment $491,000 $1,202,950 $1,220,000
- Less accumulated depreciation $146,200 $263,160 $383,160
- Net property and equipment $344,800 $939,790 $836,840
- Total assets $1,468,800 $2,886,592 $3,516,952
- Liabilities and shareholders’ equity
- Current liabilities:
- Accounts payable $145,600 $324,000 $359,800
- Accrued expenses $136,000 $284,960 $380,000
- Notes payable $120,000 $640,000 $220,000
- Current portion of long-term debt $80,000 $80,000 $80,000
- Total current liabilities $481,600 $1,328,960 $1,039,800
- Long-term debt $323,432 $1,000,000 $500,000
- Shareholders’ equity:
- Common stock $460,000 $460,000 $1,680,936
- Retained earnings $203,768 $97,632 $296,216
- Total shareholders’ equity $663,768 $557,632 $1,977,152
- Total liabilities and shareholders’ equity $1,468,800 $2,886,592 $3,516,952
- Other data:
- Stock price $8.50 $6.00 $12.17
- Shares outstanding 100,000 100,000 250,000
- Tax rate 40% 40% 40%
- Lease payments $40,000 $40,000 $40,000
- Industry
- Yr 1 Actual Yr 2 Actual Yr 3 Projected Average
- Profitability ratios
- Total margin 3.6%
- Return on assets 9.0%
- Return on equity 17.9%
- Liquidity ratios
- Current ratio 2.70
- Days cash on hand 22.0
- Debt management (capital structure) ratios
- Debt ratio 50.0%
- Debt to equity ratio 2.5
- Times-interest-earned ratio 6.2
- Cash flow coverage ratio 8.00
- Asset management (activity) ratios
- Fixed asset turnover 7.00
- Total asset turnover 2.50
- Days sales outstanding 32.0
- Other ratios
- Average age of plant 6.1
- Earnings per share n/a
- Book value per share n/a
- Price/earnings ratio 16.20
- Market/book ratio 2.90
- Computron Diagnostics
- Common Size Statement of Operations
- Industry
- Yr 1 Actual Yr 2 Actual Yr 3 Projected Average
- Revenue:
- Net patient service revenue 100.0%
- Other revenue 0.0%
- Total revenues 100.0%
- Expenses:
- Salaries and benefits 84.5%
- Supplies 3.9%
- Insurance and other 0.3%
- Provision for bad debts 0.3%
- Depreciation 4.0%
- Interest 1.1%
- Total expenses 94.1%
- Operating income 5.9%
- Provision for income taxes 2.4%
- Net income 3.5%
- Computron Diagnostics
- Common Size Balance Sheet Industry
- Yr 1 Actual Yr 2 Actual Yr 3 Projected Average
- Assets
- Current assets:
- Cash 0.3%
- Marketable securities 0.3%
- Net accounts receivable 22.3%
- Inventories 41.2%
- Total current assets 64.1%
- Property and equipment 53.9%
- Less accumulated depreciation 18.0%
- Net property and equipment 35.9%
- Total assets 100.0%
- Liabilities and shareholders’ equity
- Current liabilities:
- Accounts payable 10.2%
- Accrued expenses 9.5%
- Notes payable 2.4%
- Current portion of long-term debt 1.6%
- Total current liabilities 23.7%
- Long-term debt 26.3%
- Shareholders’ equity:
- Common stock 20.0%
- Retained earnings 30.0%
- Total shareholders’ equity 50.0%
- Total liabilities and shareholders’ equity 100.0%
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