Medival Adventures

Submitted by: Sunshine Villaneuva

I. THE PROBLEM

Medieval Adventures Company

Medieval Adventures Company was founded by Aaron Reinholz to produce a game marketed under the name “Castles and Unicorns." Each "Castles and Unicorns" cost the company $35 to produce. In addition to these production costs that varied in direct proportion to volume (so-called variable costs), the company also incurred $10,000 monthly "being in business" costs (so-called fixed costs) irrespective of the month's volume. The company sold its product for $55 each.

As of December 31, Reinholz had been producing "Castles and Unicorns" for three months using rented facilities. The balance sheet on that date was as follows:

Cash $146,250

Accounts receivable 68,750

Inventory 35,000

$250,000

Equities

Common stock $250,000

Retained earnings 0

$250,000

Reinholz was very pleased to be operating at a profit in such a short time. December sales had been 750 units, up from 500 in November, enough to report a profit for the month and to eliminate the deficit accu¬mulated in October and November. Sales were expected to be 1,000 units in January, and Reinholz's projections showed sales increases of 500 units per month after that. Thus, by May monthly sales were expected to be 3,000 units. By September that figure would be 5,000 units.

Reinholz was very conscious of developing good sales channel relationships in order to increase sales, so "Castles and Unicorns" deliveries were always prompt. This required production schedules 30 days in advance of predicted sales. For example, Medieval Adventures had produced 1,000 "Castles and Unicorns" in December for January sales, and would produce 1,500 in January for February's demand. The company billed its customers with stated terms of 30 days net, but did not strictly enforce these credit terms with the result that customers seemed to be taking an additional month to pay. All of the company's costs were paid in cash in the month in...