How Is He Doing? Ted Mohr had worked as a mid-level manager for a large retail chain with a regional headquarters in Fairfield County, Connecticut. For over fifteen years he had commuted on I95, and worried that too much of his family time was spent in traffic jams. Two years ago he acted on one of his dreams and relocated to New Hampshire to open a restaurant and novelty shop. The shop had been in its current location for over twelve years and had achieved a reputation for service and a wide range of tourist novelties. Ted ran the operations of the store, and his wife handled all the office and administrative functions. In the past year he had withdrawn $35,000 from the business for living expenses. During next year’s slow season he hoped that he and his wife would be able to take at least four weeks as a vacation. At a business luncheon a professor from the local university spoke about the university’s offer to help small businesses in the state with free consulting from its faculty. Ted thought he would give it a try, especially since the advice was free. He submitted last year’s income statement (shown in Exhibit A) and answered some questions in a phone interview. He waited one month for a reply. If he was impressed with the level of advice, he would seek further consultation. He was dismayed upon reading the professor’s comments (shown in Exhibit B) to his financial position at the end of last year. He thought it only fair to give the professor a chance to explain his analysis, so he drafted a short letter to him. The main elements of the letter were as follows: “Thank you for your analysis of my restaurant/novelty business. However there are several questions on the schedules you attached. First, you show I had a merchandising loss of $72,500- I thought I was doing ok, not setting the world on fire, but ok. You show as an expense the $103,000 salary I made two years ago in the corporate world. I gave that up to be in my own business; I am working now for a profit and not a salary. You also show rent on the building of $39,000 which would be the current rental to a new lessee. But I bought the building to run the business there, and I pay tax, insurance, and property taxes. Lastly, you show interest of $44,600 on my invested capital (4.5% on invested capital of $990,000). My family invested that capital so we would avoid excessive borrowing. Please give me a call so I can reconcile these items.” Required: 1) did Mr. Mohr make a profit? If so, how much? Can you explain the difference between the two income numbers presented? 2) Is Mr. Mohr a good business executive? Exhibit A goods available for sale 1,257,508 less ending inventory 551,300 cost of goods sold 706,208 gross profit 296,163 Operating expenses salaries 94,800 advertising 17,200 wrapping supplies 5,564 supplies 12,201 taxes, insurance, repairs depreciation 26,163 heat, light, & power 5,158 taxes 3,420 insurance 8,633 depreciation store equipment 6,670 interest 1,788 miscellaneous 15,336 income taxes 15,754 total expenses 212,687 net income $83,476 Exhibit B Sales $1,002,371 Cost of Goods Sold: opening inventory 502,588 purchases 754,920 goods available for sale 1,257,508 less ending inventory 551,300 cost of goods sold 706,208 gross profit 296,163 Operating expenses owner's salary 103,000 salaries 94,800 advertising 17,200 wrapping supplies 5,564 supplies 12,201 rent 39,000 heat, light, & power 5,158 taxes 3,420 insurance 8,633 depreciation store equipment 6,670 interest 1,788 interest on owner's capital 44,600 miscellaneous 15,336 income taxes 11,254 total expenses 368,624 net income/(loss) ($72,461)
How Is He Doing?
Ted Mohr had worked as a mid-level manager for a large retail chain with a regional headquarters in Fairfield County, Connecticut. For over fifteen years he had commuted on I95, and worried that too much of his family time was spent in traffic jams. Two years ago he acted on one of his dreams and relocated to New Hampshire to open a restaurant and novelty shop. The shop had been in its current location for over twelve years and had achieved a reputation for service and a wide range of tourist novelties. Ted ran the operations of the store, and his wife handled all the office and administrative functions. In the past year he had withdrawn $35,000 from the business for living expenses. During next year’s slow season he hoped that he and his wife would be able to take at least four weeks as a vacation.
At a business luncheon a professor from the local university spoke about the university’s offer to help small businesses in the state with free consulting from its faculty. Ted thought he would give it a try, especially since the advice was free.
He submitted last year’s income statement (shown in Exhibit A) and answered some questions in a phone interview. He waited one month for a reply. If he was impressed with the level of advice, he would seek further consultation.
He was dismayed upon reading the professor’s comments (shown in Exhibit B) to his financial position at the end of last year. He thought it only fair to give the professor a chance to explain his analysis, so he drafted a short letter to him.
The main elements of the letter were as follows:
“Thank you for your analysis of my restaurant/novelty business. However there are several questions on the schedules you attached. First, you show I had a merchandising loss of $72,500- I thought I was doing ok, not setting the world on fire, but ok. You show as an expense the $103,000 salary I made two years ago in the corporate world. I gave that up to be in my own business; I am working now for a profit and not a salary. You also show rent on the building of $39,000 which would be the current rental to a new lessee. But I bought the building to run the business there, and I pay tax, insurance, and property taxes. Lastly, you show interest of $44,600 on my invested capital (4.5% on invested capital of $990,000). My family invested that capital so we would avoid excessive borrowing. Please give me a call so I can reconcile these items.”
Required: 1) did Mr. Mohr make a profit? If so, how much? Can you explain the difference between the two income numbers presented?
2) Is Mr. Mohr a good business executive?
Exhibit A
| goods available for sale | 1,257,508 | |||||
| less ending inventory | 551,300 | |||||
| cost of goods sold | 706,208 | |||||
| gross profit | 296,163 | |||||
| Operating expenses | ||||||
| salaries | 94,800 | |||||
| advertising | 17,200 | |||||
| wrapping supplies | 5,564 | |||||
| supplies | 12,201 | |||||
| taxes, insurance, repairs | ||||||
| 26,163 | ||||||
| heat, light, & power | 5,158 | |||||
| taxes | 3,420 | |||||
| insurance | 8,633 | |||||
| depreciation store equipment | 6,670 | |||||
| interest | 1,788 | |||||
| miscellaneous | 15,336 | |||||
| income taxes | 15,754 | |||||
| total expenses | 212,687 | |||||
| net income | $83,476 |
Exhibit B
| Sales | $1,002,371 | |||||
| Cost of Goods Sold: | ||||||
| opening inventory | 502,588 | |||||
| purchases | 754,920 | |||||
| goods available for sale | 1,257,508 | |||||
| less ending inventory | 551,300 | |||||
| cost of goods sold | 706,208 | |||||
| gross profit | 296,163 | |||||
| Operating expenses | ||||||
| owner's salary | 103,000 | |||||
| salaries | 94,800 | |||||
| advertising | 17,200 | |||||
| wrapping supplies | 5,564 | |||||
| supplies | 12,201 | |||||
| rent | 39,000 | |||||
| heat, light, & power | 5,158 | |||||
| taxes | 3,420 | |||||
| insurance | 8,633 | |||||
| depreciation store equipment | 6,670 | |||||
| interest | 1,788 | |||||
| interest on owner's capital | 44,600 | |||||
| miscellaneous | 15,336 | |||||
| income taxes | 11,254 | |||||
| total expenses | 368,624 | |||||
| net income/(loss) | ($72,461) |
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