Guy and Susan Johnson owns Johnsons Jewelry Products (JJP) stores in Florence, South Carolina. He believes that the stores have been successful and he wants to open a new store in Sumter about 30...

Guy and Susan Johnson owns Johnsons Jewelry Products (JJP) stores in Florence, South Carolina. He believes that the stores have been successful and he wants to open a new store in Sumter about 30 miles west of Florence. Guy has been in the retail line for over 30 years, and he worked at his uncle’s hobby shop while in high school and college before starting his own store at the age of 25. Susan used to be a legal assistant at a local law office before quitting to help her husband run the jewelry store.

Two big secrets to a successful jewelry store operation are good location and product selection. Guy’s first store is located in downtown Florence. Since he had been born and raised in Florence, he attracted a good customer base that remained loyal to his store after some of the giant chain related jewelry stores began to move into the area. About 10 years ago, Guy saw the change in customer shopping habits and purchased a second store near an interchange to Interstate 95 in a rapidly growing retail area. Lots of new families had moved into the area, and Guy could not totally rely on the “good old boy” market alone to sustain his market share. This second store catered to the younger more mobile generation that shopped at or near malls.

Guy now was looking into other markets. Sumter was not located on the interstate, but the area was growing because of its proximity to the state capital of Columbia, which was just 30 miles to its west. Guy believed that the people of Sumter who commuted to work in Columbia would prefer to limit their driving for shopping activities to the immediate Sumter area. Also, since Guy was a respected citizen of Florence, his reputation as an honest businessman had spread to Sumter. He believed he could quickly build up a new customer base in that location. The big chain type stores also did not seem as interested in the Sumter area, preferring instead to locate in the larger metropolitan areas of Columbia and Florence. The appropriate jewelry items to feature in his stores were very important. Guy felt that his area of influence was strictly regional, and he did not have to carry much of the standard inventory of the national chain type of jewelry stores. His jewelry was more a reflection of local interest; thus a lot of his wedding ring sets and related items were hot sellers.

Guy went to the Florence National Bank to inquire about funding for the new store location. He had found an abandoned furniture store in downtown Sumter along Main Street that was up for sale for $350,000. The store seemed to be the right size and at a good location. A grocery store was in the same block with ample off street parking. He brought his balance sheet for the last two years and an income statement for the last operating year to the bank to support his request for a retail loan of $350,000. (Copies of the financial statements are listed at the end of the quiz).

Michael Miser, the local bank loan vice president had been a friend of Guy’s for many years. He was a customer at Guy’s jewelry store and purchased his wedding ring set from Guy’s store, and his bank had underwritten the funding for the second store. Michael was excited about Guy’s expansion goals and the prospect of another business loan with his friend. At the same time, Michael had to live up to his reputation and because of interest rates being what they are, he had to be very critical of any loan coming across his desk. He was not about to approve a loan unless he was almost 100 percent sure that the borrower would not default. Guy’s past success had alleviated much of Michael’s concern, but he still wanted to complete a detailed analysis of the financial performance of JJP during the last calendar year. Upon reviewing the balance sheet, Michael knew with the covid pandemic recently, foot traffic was reduced at many retail stores, but JJP showed a strong profitable performance. The current financial statements did not seem to give enough information to answer Michael’s questions and he asked Guy to prepare a statement of cash flows for the year ending December 31, 20xx. Guy has come to you for some help with this loan.



Develop a Statement of Cash Flows for JJP for the 2nd

year ending December 31, 20xx.

2. Analyze the financial performance of JJP based on


the financial statements (using ratios and cash flows.)

3. If you were Guy how would you explain to Michael Miser the financial situation to help justify the loan request? (Not just yes or no question, please ratios and cash flows to support your analysis in your answer!)

4. If you were Michael Miser, would you approve the loan for JJP? Why or why not? (Not just yes or no question, please ratios and cash flows to support your analysis in your answer!)

JJP info for the last two years Balance sheets

Balance Sheet

Year 2

Year 1


Current Assets




Accounts receivable






Prepaid Expenses



Long term assets




Accumulated Dep. Plant assets



Total Assets




Current Liabilities

Accounts Payable



Income Tax Payable



Income taxes payable



Dividends Payable



Long-term liabilities

Long term notes payable



Total Liabilities



Stockholders’ Equity

Common Stock $5 par



Retained Earnings



Total Stockholders Equity



Total Liab. And Stockholders Equity

$ 357,000


JJP Income Statement last year

Income Statement Year 2

Sales Revenue

$ 590,000

Costs of Goods Sold


Gross Profit


Operating Expenses

Other Operating Expense


Depreciation Expense-Plant Assets


Interest Expense


Total Operating Expenses


Operating Income


Other Revenue and Expenses

Loss on Sale of Plant Assets


Loss on retirement of bonds


Total other Rev and Exp.


Net Income Before Taxes


Income Tax Expense


Net Income


Additional transaction data

A. The accounts payable balances result from inventory purchases.

B. Purchased $60,000 in plant assets by issuing $60,000 of notes payable


C. Sold plant assets with a book value of $8,000 (original costs of $20,000 and accumulated depreciation of $12,000) for $2,000 cash, yielding a $6,000 loss.

D. Received $15,000 cash from issuing 3,000 shares of common stock.

E. Paid $18,000 cash to retire notes with a $34,000 book value, yielding a $16,000 gain.

F. Declared and paid cash dividends of $14,000

Part Two Contribution Margin

James and Jackie Simpson set up a company called Heavenly Sounds Incorporated. They provide music CDs around the Virginia Beach, Virginia area for various musical artist and aspiring musical artists. The company sold 12,000 CDs and they sell for $18 each for the year ended December 31. The tax rate is 21%.

Variable production costs

Plastic for casing - $1,500

Wage of assembly workers - $30,000

Labeling - $3,000

Selling and Administrative-$6,000

Fixed manufacturing costs

Rent on Factory - $6,750

Factory maintenance - $4,520

Factory machine depreciation - $20,000

Fixed selling and administrative costs

Lease of equipment - $1,050

Accounting staff salaries - $15,000

Administrative management salaries - $120,000

Required: Please complete the following:

1. Compute the contribution margin.

2. Compute the contribution margin ratio.

3. Compute the break-even in sales units.

4. Compute the break-even in sales dollars.

5. Compute the margin of safety in units.

6. Prepare a contribution income statement for the year end.

7. Compute the unit sales required for a monthly after-tax profit of $50,000.

Nov 30, 2023

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