i need answers to question 1 a-d and 2 of the attachment

i need answers to question 1 a-d and 2 of the attachment

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The Journal of Business Cases and Applications

www.jbcaonline.org

77

Winter, 2009
A Change of Taste
Michael L. Garcia, The University of Tampa
Karen D. Squires, Accessible Continuing Education Solutions
ABSTRACT:
This case is a disguised real world event where students break-even analysis, introduce
business valuation issues, fraud, and ethics.
The case is appropriate for managerial accounting courses.
INTRODUCTION
I smiled to myself as I drove south on Interstate 95.
I felt like I was joining the retiree migration to
Florida.
Like other retirees, I was moving back to my home town to be close to elderly relatives, long
time friends and with a plan to buy a business to keep me busy and to supplement my retirement income.
Many of my friends had their own businesses and were active in the local business community.
One in
particular, Mel Rivers, thought that he’d found a good opportunity.
Mel and I grew up together and was
one of my few friends who knew that I had worked for the past 20 years as a revenue agent for the
Treasury Department.
I generally told people that I worked for the Federal Government without
mentioning that I was with the IRS.
Mel offered to introduce me to Ronald Zumbado, a business leader and respected individual within the
community. Mel told me that he had met Ronald a couple of years ago at a Chamber of Commerce
meeting and that Mr. Zumbado specialized in buying troubled companies, turning them around and then
selling them.
About a month before my official retirement date, Mel had approached Ronald to see if he
knew of any businesses which might be fore sale.
Ronald said “this is fabulous timing!”
And went on to
indicate that he was ready to sell his latest venture which was a small retail outlet selling a Spanish
custard called Flan. This sweet delicacy is a favorite of local residents and tourists alike.
Mel started the meeting by saying, “Ronald, I’d like for you to meet Joe Jimenez, one of my oldest and
closest friends.” In our preliminary meeting Ronald told to me that he had been able to improve Tasty
Flan’s operations to the point that and he is ready to start something new. Ronald said that when he
started the business, most of the revenue came from over the counter sales and that he had expanded sales
by finding restaurants willing to put Tasty Flan on their dessert menus.
He also had one Spanish market
that was selling his product. He said that he felt that there was significant potential for sales growth
through the commercial market for flan, but he hadn’t had the chance to fully develop that potential.
That
was one of the reasons that he wanted to sell the business to someone who could invest the time to
develop the commercial side of the business.
And right now he didn’t have the time because he’s had to
get involved in another company of his. Apparently the current owner needed some help running the
business and he wanted to help the new owner make the business flourish.
Ronald exclaimed if you are interested in Tasty Flan you can have access to the business’s financial
statements and any other documentation necessary in order to complete your due diligence. The business
leases all of its fixed assets except for a used delivery vehicle. The selling price for the business is
$250,000. If you prove to be an excellent credit risk I will hold paper on the sale with a 20% down
payment and the balance in a note with annual payments for 5 years at 12%. Joe, if you find these terms
agreeable I will enjoy doing business with you. I assured Ronald that from what I have researched before
that his terms were indeed competitive with other financial institutions in the area, but I would have to
review the business’s records before I would be willing to agree on the sales price. Ronald agreed in

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The Journal of Business Cases and Applications

www.jbcaonline.org

78

Winter, 2009
spirit, we set up a forthcoming meeting where I would have access to the business records for Tasty Flan.
Ronald also wanted me to shadow him for a couple of days just to see how everything functions and to
meet certain customers & vendors on the commercial side of the business.
As planned, I met with Ronald and while shadowing him for the first few days observed that he had a
wonderful demeanor and that his relationships with everyone around him were positive.
Further, he was
approachable. He seemed to have control and managed an efficient operation. When we went into
Ronald’s office at Tasty Flan he said “did you notice that this business has significant cash sales?”
I
merely nodded while Ronald continued, “The information that I’m handing you shows sales figures
which are approximately $40,000 less per year than the true amount.”
I said, “interesting, did you record
all of the expenses?”
He said “ABSOLUTELY!” And then with a smile handed me a package of
financial material that consisted of the following:
Copies of Profit/ (Loss) statements of Tasty Flan from
Ronald’s accountant. (See Exhibit 1); Copies of the Schedule C operating results along with the IRS
transcripts for the tax years of 2005, 2006, & 2007 concerning the schedule C for Tasty Flan; state sales
tax returns for Tasty Flan; and finally access to everything in the Tasty Flan office, including all of the
paper copies of records in the file cabinets and to the office computer.
EXHIBIT 1
Years
Item
2005
2006
2007
Sales
$225,000
$240,000
$280,000
CGS:
Materials
68,300
81,000
83,000
Labor (Part-Time)
55,000
58,000
60,000
Total CGS
123,300
139,000
143,000
Operating Expenses:
Bank Charges
225
240
280
Delivery Truck Exp.
5,625
6,000
6,200
Equipment Rental
9,000
9,000
9,000
Insurance
3,375
4,800
4,875
Legal & Professional
2,250
2,400
2,500
Licensing
113
195
200
Office supplies
450
513
510
Payroll Expenses
4,208
4,437
4,590
Rent
15,000
16,000
16,000
Repairs
2,867
3,075
1,500
Total Operating Exp.
43,113
46,660
45,655
Utilities:
Gas & Electric
8,438
9,000
10,500
Telecommunications
1,440
1,440
1,440
Waste Disposal
4,500
4,800
5,205
Water
3,375
3,600
4,200
Total Utilities
17,753
18,840
21,345
Total Expenses
184,166
204,500
210,000
Profit (Loss)
$40,834
$35,500
$70,000

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