Case Background:
Ten years prior to December, 1978, the company had no debt because it had conservative financial policies, which maintained a strong working capital position as a buffer against economic uncertainty. In December,1978, Hampton requested a $1 million loan from the St. Louis National Bank. The loan’s terms were a monthly interest payment at a rate of 1.5%, with the principal to be paid back at the end of September, 1979. Now (September of 1979), Benjamin G. Cowins, president of Hampton, has asked to renew the initial loan until end of 1979, and, has requested an additional loan of $350,000 with promise of repayment at the end of December, 1979 with an interest rate of 1.5% per month. This additional loan is required for an update of their machinery which hasn’t been done since the economy went into a recession in the early 1970s.
For the last several months, Hampton’s shipment schedule has been upset because they have had to wait for parts from their suppliers. On August 31, the accumulation of seven machines cost about $1,320,000, in addition to the installation cost for these parts. They received the parts last week, and will be able to complete a number of machines within next few weeks. The reduction in work in progress of about $1,320,000 is due to not receiving the electronic control mechanisms on time. However, the remainder of their work in progress inventories will probably remain steady for the foreseeable future because of their capacity rate of production.
In July and August, Hampton bought raw materials beyond their immediate needs to be assured of completing their order schedule to be shipped by the end of the year. Therefore, they currently have accumulated about $420,000 worth of scarcer components above their normal raw materials inventories. They estimate it will be used by the end of the year. Because they bought ahead this way, they expect to cut raw material purchases to about $600,000 a month in each of the four remaining months of 1979.
The company’s revised shipment estimates are: September, $2,163,000; October, $1,505,000; November $1,604,000; December, $2,265,000. The shipment estimates include a $2,100,000 order for the General Aircraft Corporation. Hampton is now scheduled to ship against this order as follows: September, $840,000; October, $840,000; November, $420,000. Because General Aircraft gave Hampton an advance payment of $1,566,000 on this order, the company will be due nothing on these shipments until their $1,566,000 credit with Hampton is exhausted.