To improve its competitive position, Martin Manufacturing is planning to implement a major equipment modernization program. Included will be replacement and modernization of key manufacturing equipment at a cost of $400,000 in 2004. The planned program is expected to lower the variable cost per unit of finished product. Terri Spiro, an experienced budget analyst, has been charged with preparing a forecast of the firm’s 2004 financial position, assuming replacement and modernization of manufacturing equipment. She plans to use the 2003 financial statements presented on pages 92 and 93, along with the key projected financial data summarized in the following table.
Martin Manufacturing Company
Key Projected Financial Data (2004)
Data item Value
Sales revenue $6,500,000
Minimum cash balance $25,000
Inventory turnover (times) 7.0
Average collection period 50 days
Fixed-asset purchases $400,000
Dividend payments $20,000
Depreciation expense $185,000
Interest expense $97,000
Accounts payable increase 20%
Accruals and long-term debt Unchanged
Notes payable, preferred and common stock Unchanged
a. Use the historical and projected financial data provided to prepare a pro forma income statement for the year ended December 31, 2004.
b. Use the projected financial data along with relevant data from the pro forma income statement prepared in part a to prepare the pro forma balance sheet at December 31, 2004.
c. Will Martin Manufacturing Company need to obtain external financing to fund the proposed equipment modernization program? Explain