1. Manufactured Home business focuses on the lower end of the market.
Its key aspects are marketing, price competitive (target individuals in the low income category) and offering both single and multi-sectional units.
We think that the company does have a viable business, because revenues are increasing over the years (1984-1986). This can be caused due to the fact that revenues are being split in two sources: the sale of homes and the interest rate spread. But due to sales failures there is a concern about the increasing liabilities. So if these liabilities will rise till really high numbers and will overstate the assets, the business could get damaged and then it ...view middle of the document...
Under this agreement, Manufactured Homes was responsible for payments to the financial institution if the customer failed to make the payments specified in the installment contract. While the installment sale interest rate that manufactured homes charged its customers was limited by competitive conditions, it was higher than market interest rates. At the time of sale, the company receives immediate payment for the stated principal amount of the installment contract and a portion of the finance participation resulting from the interest rate differential (security against credit losses). The company accounts for these transactions as sales and recognizes finance participation income equal to the difference between the contractual interest rates of the installment contracts and the agreed upon rates tot the financial institutions; the portion retained by the financial institutions is discounted for estimated time of collection and carried at its present value.
This accounting treatment is not reasonable, because there is an insecure about the recording revenues and assets. Manufactured Sales recording revenues at the time they get the ‘loan’ of the customers from the financial institution. When these loans won’t pay back, Manufactured Sales need to pay this loans back and make a loss, but these losses are already recorded as assets. So it don’t give a right view about revenues and assets, because they will record a huge revenue and assets what about 84 to 180 months changes in losses and aren’t assets anymore.
The assumptions are if the three conditions according to FASB-77 is sustain, transfers of receivables must be reported as sales. If any of the conditions is not satisfied, the seller of the receivable ( Manufactured Homes) must report the proceeds from the transfer as a loan against the receivable. We agree with this assumption, but it is difficult to manage.
4. Gross profit margin = (Sales – Cost of Sales) / Sales
Net Sales: $106.095.667
Finance participation income: $12.084.108
Cost of Sales $86.212.901
Provision for losses on credit sales $3.777.900
Home sales gross margin ratio:
(106.096.667 – 86.212.901) / 106.095.667 = 0,187
Financial participation gross margin ratio:
(12.084.108 – 3.777.900) / 12.084.108 = 0,687
The ratio’s show us that the financial participation ratio is much higher than the home sales ratio. This tells us that the financial participation income is more profitable in ratio to Manufactured Homes than home sales is. The higher ratio can be explained by looking at the meaning of gross profit margin. It is an indication of the extent to which revenues exceed direct costs associated with sales. In this case because of the higher financial participation ratio, it means that its more likely for financial participation income that the revenues exceed direct costs than it is for home sales. Nevertheless without home sales there are no financial participation income.