James Confectioners: A Case Study

James Confectioners: A Case Study Resource: Essentials of Entrepreneurship and Small Business Management pgs. 678-681 Case 6: James Confectioners--Part 1 Respond to all the five Questions in a concise manner in a 700- to -1050-word paper. (My Question is number 3) 3. How do the ratios you calculated for this year compare to those of the typical company in the industry? Do you spot any areas that could cause the company problems in the future? Explain. James Confectioners: A Case Study Resource: Essentials of Entrepreneurship and Small Business Management pgs. 678-681 Case 6: James Confectioners--Part 1 Respond to all the five Questions in a concise manner in a 700- to -1050-word paper. (My Question is number 3) 3. How do the ratios you calculated for this year compare to those of the typical company in the industry? Do you spot any areas that could cause the company problems in the future? Explain. Case 6 James Confectioners—Part 1 Squeezed by Rising Costs, a Confectioner Struggles to Cope Telford James and his wife Ivey are the second-generation owners of James Confectioners, a family-owned manufacturer of premium chocolates that was started by Telford’s father, Frank, in 1964 in Eau Claire, Wisconsin. In its nearly 50 years, James Confectioners has grown from its roots in a converted hardware store into a large, modern factory with sophisticated production and quality control equipment. In the early days, all of Frank’s customers were local shops and stores, but the company now supplies customers across the United States and a few in Canada. Telford and Ivey have built on the company’s reputation as an honest, reliable supplier of chocolates. The prices they charge for their chocolates are above the industry average but are not anywhere near the highest prices in the industry even though the company is known for producing quality products. Annual sales for the company have grown to $3.9 million, and its purchases of the base chocolate used as the raw materials for their products have increased from 25,000 pounds 20 years ago to 150,000 pounds. The Jameses are concerned about the impact of the rapidly rising cost of the base chocolate, however. Bad weather in South America and Africa, where most of the world’s cocoa is grown, and a workers’ strike disrupted the global supply of chocolate, sending prices upward. There appears to be no relief from high chocolate prices in the near future. The International Cocoa Organization, an industry trade association, forecasts world production of cocoa, from which chocolate is made, to decline by 7.2 percent this year.1 Escalating milk and sugar prices are squeezing the company’s profit margins as well. Much to James and Ivey’s dismay, James Confectioners’s long-term contracts with its chocolate suppliers have run out, and the company is purchasing its raw materials under short-term, variable-price contracts. They are concerned about the impact that these increases in cost will have on the company’s financial statements and on its long-term health. Ivey, who has the primary responsibility for managing James Confectioners’s finances, has compiled the balance sheet and the income statement for the fiscal year that just ended. The two financial statements appear below: CASE 6?? ???? JAMES CONFECTIONERS—PART 1                                     Pg      679 Balance Sheet, James Confectioners December 31, 20xx Assets CURRENT ASSETS Cash                                                 $ 161,254 Accounts Receivable                                      $ 507,951 Inventory                                             $ 568,421 Supplies                                         $ 84,658 Prepaid Expenses                                     $ 32,251 Total Current Asset                                        $ 1,354,536 FIXED ASSETS Land                                             $ 104,815 Buildings, net                                     $ 203,583 Autos, net                                          $ 64,502 Equipment, net                                     $ 247,928 Furniture and Fixtures, net                                  $ 40,314 Total Fixed Assets                                     $ 661,142 Total Assets                            $ 2,015,678 Liabilities CURRENT LIABILITIES Accounts Payable                                          $ 241,881 Notes Payable                                           $ 221,725 Line of Credit Payable                                       $ 141,097 Accrued Wages/Salaries Payable                          $ 40,314 Accrued Interest Payable                                 $ 20,157 Accrued Taxes Payable                                 $ 10,078 Total Current Liabilities                      $ 675,252 Long-Term Liabilities Mortgage                                         $ 346,697 Loan                                            $ 217,693 Total Long-Term Liabilities                    $ 564,390 Owner’s Equity James, Capital                                     $ 776,036 Total Liabilities and Owner’s Equity                         $ 2,015,678 Pg 680 Income Statement, James Confectioners Net Sales Revenue                                     $3,897,564 Cost of Goods Sold Beginning Inventory, 1/1/xx                     $ 627,853 + Purchases                             $2,565,908 Goods Available for Sale                     $3,193,761 - Ending Inventory, 12/31/xx                     $ 568,421 Cost of Goods Sold                                     $2,625,340 Gross Profit                                   $1,272,224 Operating Expenses Utilities                              $163,698 Advertising                             $155,903 Insurance                               $ 74,065 Depreciation                               $ 74,043 Salaries and Benefits                          $381,961 E-commerce                               $ 38,976 Repairs and Maintenance                       $ 58,463 Travel                                   $ 23,385 Supplies                              $ 15,590 Total Operating Expenses                             $ 986,084 Other Expenses Interest Expense                          $119,658 Miscellaneous Expense                         $ 1,248 Total Other Expenses                                       $ 120,906 Total Expenses                                         $1,106,990 Net Income                                         $ 165,234 To see how the company’s financial position changes over time, Ivey calculates 12 ratios. She also compares James Confectioners’s ratios to those of the typical firm in the industry. The table below shows the value of each of the 12 ratios from last year and the industry median: Ratio Comparison James Confectioners Confectionery Ratio                        Current Year    Last Year             Industry Median* Liquidity Ratios Current ratio                           1.86                      1.7 Quick ratio                          1.07                      0.8 Leverage Ratios Debt ratio                            0.64                      0.7 Debt-to-Net-Worth ratio                   1.71                      1.0 Times-Interest-Earned ratio                   2.49                     2.3 Operating Ratios Average Inventory Turnover Ratio                4.75                            4.9 Average Collection Period Ratio                34.6                 23.0 days Average Payable Period Ratio                31.1                 33.5 days Net-Sales-to-Total-Assets Ratio                2.17                       2.1 Profitability Ratios Net-Profit-on-Sales Ratio                    7.40%                 7.1% Net-Profit-to-Assets Ratio                    9.20%                 5.6% Net-Profit-to-Equity Ratio                    29.21%                        16.5% “How does the financial analysis look for this year, Hon?” Telford asks.“I’m about to crunch the numbers now,” says Ivey. “I’m sure that rising chocolate prices have cut into our profit margins. The question is ‘how much’?” “I think we’re going to have to consider raising prices, but I’m not sure how our customers will respond if we do,” says Telford. “What other options do we have?” Questions 1. Calculate the 12 ratios for James Confectioners for this year. 2. How do the ratios that you calculated for this year compare to those that Ivey calculated for the company last year? What factors are most likely to account for those changes? 3. How do the ratios you calculated for this year compare to those of the typical company in the industry? Do you spot any areas that could cause the company problems in the future? Explain. 4. Develop a set of specific recommendations for improving the financial performance of James Confectioners using the analysis you conducted in questions 1 to 3. 5. What pricing recommendations can you make to Telford and Ivey James?