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We believe PC Depot will be a great venture for Thompson as evident by a net income of $5,054 for the companys first month of operations. We feel that our recommendations to reduce inventory costs and debt will be beneficial to PC Depot

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Introduction

CASE ANALYSIS To: Dr. Peggy C. Wright From: NC Gold (Sherry Barton, David Bennett, Perry Priester, Richard Warren, Kimberly Wood) Subject: Case 4-1 PC Depot Date: 12/19/2007 In September, Barbara Thompson started PC Depot, a retail store for personal computers, with initial startup costs in the amount of $158,115 (Anthony, 2004, p.108). During the month various transactions occurred resulting in a net income for the month of September in the amount of $5,054. Financial transactions for the month of September have been recorded in the general journal, which also includes adjusting and closing entries. NC Gold has prepared the balance sheet and income statement for PC Depot for the month of September. A financial analysis of the balance sheet and income statement was conducted and areas of concern were identified. One area of concern for PC Depot is the amount of inventory they are carrying for a start up business. During the month of September, PC Depot purchased merchandise for inventory in the amount of $187,440 on credit from suppliers. ...read more.

Middle

Thompson needs to research and consider all possible suppliers when considering delivery on an as needed basis. Another option for PC Depot is the consignment method of inventory. "Consignment inventory can be defined as goods placed at a customer's location, with ownership of these goods remaining with the supplier. Payment is not made until the item is actually used." (Czarnecki, 2004, p. 24) By applying this method, PC Depot would not incur losses due to unused or unsold merchandise. The consignment method would eliminate upfront costs and allow PC Depot to maintain inventory on hand. The company would also be able to return unused inventory to the supplier within a reasonable amount of time. Dell Computers serves as an example of a company that uses consignment inventory. Dell's Michael Gray credits the company's success to the low levels of inventory and says companies run risk of managing inventory that becomes obsolete (A Reminder, 2005). The consignment method of inventory, while potentially beneficial to PC Depot, requires proper management with suppliers. ...read more.

Conclusion

If PC Depot were to use the consignment method of inventory, they may still incur costs associated with the housing and returning unused merchandise. NC Gold recommends that PC Depot reduce as much cost as possible by eliminating inventory overage. Thompson should also consider a line of credit as opposed to paying interest on the $100,000 bank loan. With a line of credit, Thompson will be able to borrow money as needed and pay interest only on the amount used. To accomplish this, Thompson should use the initial cash investment, paid-in capital, of $65,000 to pay towards the $100,000 note payable and utilize the line of credit when needed. Applying the standard 8% rate on a line of credit, Thompson would pay $4,800 in interest as opposed to $15,000 annually (http://www.moneycafe.com/library/prime.htm). We believe PC Depot will be a great venture for Thompson as evident by a net income of $5,054 for the company's first month of operations. We feel that our recommendations to reduce inventory costs and debt will be beneficial to PC Depot and provide them an opportunity to be more profitable in the future. Our findings and recommendations can be supported by the following financial exhibits. 5 3 ...read more.

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