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Booker Jones Analysis Essay

1.
A. If the cost of barrels were to be incorporated into the inventory account (balance sheet), then the cost of barrels used (Income statement) can be reduced. From 1960-1961, Booker Jones increased its barrels produced from 43,000 barrels to 63,000 barrels. That is 20,000 barrel increased in just one year. The cost per barrels is $31.50. (20,000 * 31.50= $630,000)

We can reduce the cost per barrel expense from income statement of $630,000.  (-407,000+630,000= 223,000) Therefore, pretax profit would have been $223,000 instead of net loss of $407,000.

B. If the change were made retroactively as of June 1, 1959 then

Effect on the balance sheet at the end of 1960

Number of barrel in inventory in 1960 is 172,000
(172,000 barrels * $31.50 = 5,418,000)
$5,418,000 is the increased inventory after incorporated the cost of barrels to inventory. ($5418000 + $4,506,000 = $9,924,000)
$9,924,000 is the new ending inventory in 1960
Deferring the Aging costs into the inventory balance would increase the Net Profit in 1960. This would then increase the Retained Earnings account on the balance sheet

Effect on the balance sheet at the end of 1961

Number of barrels in inventory in 1961 is 192,000
(192,000 barrels * $31.50 = $6,048,000)
$6,048,000 is the increased in inventory after incorporating the cost of barrels to inventory ($6,048,000 + $5,030,000 = $11,078,000)
$11,078,000 is the new ending inventory in 1960
Deferring the Aging costs into the inventory balance would increase the Net Profit in 1960. This would then increase the Retained Earnings account on the balance sheet

Effect on the income statement for 1960

2. We do not believe that Jones went from a profit in 1960 to a loss for
1961 because they can capitalize the patented barrels as inventory instead of expense it. Because of the 4 years aging life, it makes sense to capitalize the barrels and expense it as the aging process reduced.

7.
1. The original Levi’s Store Channel has a higher return on invested capital, meaning it is a good investment in a long run.

Column1
Wholesale
Channel
Estimate
Original Levi’s
Store Channel
Estimate
Operating Profit before Tax
4
6
Tax at 40%
1.6
2.4
NOPAT
2.4
3.6

Fixed Asset

Factory PP&E
5
5
Distributed PP&E
1
2
Total Fixed Asset
6
7
Non-Cash Working Capital

Current Asset
8
12
Current Liability
1
1
Cash
0
0
Total Non-Cash Working Capital
7
11
Invested Capital
13
18

Return on Invested Capital
18%
20%

2. Value Chain Analysis

Providing strategic direction – corporate strategy
Provide the perfect fit jean for customers
Market segment for unsatisfied customers
Broaden market segment by offering customized jeans
Generating customer demand – sales, marketing and customer service Increase in profit
24% unsatisfied customers
Provide more styles, more colors, better fits
4224 possible combination of measurement
400 prototype pairs stock at Kiosk for customers to try on
Fulfilling customer demand – supply chain, manufacturing, production Order is transmitted directly to Levi’s factory. Each pair of jeans is individually cut 3 days shipping back to customers (at $5 extra charge per pair) Pull based: responsiveness to actual buying patterns, improve manufacturing, and delivery cycle Need to find ways to fix the 8 months lag between ordering cotton fabric and selling the final pair of jeans. Providing support services – Finance, HR, legal and compliance Need additional finance to pay for trained personal clerks

Need to take out loan to finance initial investment of the project In 4 retail store locations


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