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Medival Case Company

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Case 11-1 Medieval Adventures Company

Medieval Adventures Company was founded by Aaron Reinholtz to produce a gain marketed under the name 'Castlles and Unicorns'. Each C & U caused the company $35 to produce. IN addition to this production costs that varied in direct proportion to volume (so called variable costs), the company also incurred $10,000 monthly 'being in busdiness' costs (so called fixed costs). AS of December 31st, Reinholtz had been producing C & U for 3 months using rented facilities. Reinholtz was very pleased to be operating at a profit in such a short time. Reinholtz was very conscious of developing good sales channel relationships in order to increase sales, so C & U deliveries was always prompt. The company billed its customers with stated terms of 30 days net, but did not strictly enforce this credit terms with the result that customers seemed to be taking in addition month to pay. Reinholtz's predictions came true. By March, sales had reached 2,000 C & U, and 2,500 units were produced in March for April sale. In mid April Reinholz went on a family vacation. Within the week the company's bookkeeper called. Medieval Adventures' bank balance was almost zero so necessary materials could not be purchased.

By looking at the Balance Sheet for April, we see that Medieval Adventures Company goes into negative cash flow on that month. During the month of July is the last time company goes in the negative cash flow. Cash bottoms out at $(40,000), so this is the amount of funds they will need to raise. If they decide to get a short-term loan for the $40,000, they will be able to repay it in October. A line of credit may be better option for this situation. They can draw the money as needed and they would only pay interest on the portion drawn upon.

Even though they were profitable in a very short period of time, monthly increases in

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