Mini Case Chapter 13 Donna Jamison Answer

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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
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
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
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

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
Yr 1 Actual Yr 2 Actual Yr 3 Projected Average
Net patient service revenue 100.0%
Other revenue 0.0%
Total revenues 100.0%
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
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%