Question: Review of Forecast Assumptions. Dodd Manufacturing Corporation has engaged you to attest to the reasonableness of the assumptions underlying its forecast of revenues, costs, and net income for the next calendar year, 2015. Four of the assumptions follow.
1. The company intends to sell certain real estate and other facilities held by Division B at an after-tax profit of $600,000; the proceeds of this sale will be used to retire outstanding debt.
2. The company will call and retire all outstanding 9 percent subordinated debentures (callable at 108). The debentures are expected to require the full call premium given present market interest rates of 8 percent on similar debt.
A rise in market interest rates to 9 percent would reduce the loss on bond retirement from the projected $200,000 to $190,000.
3. Current labor contracts expire on September 1, 2015, and the new contract is expected to result in a wage increase of 5.5 percent. Given the forecasted levels of production and sales, after-tax operating earnings would be reduced approximately $50,000 for each percentage point of wage increase in excess of the expected contract settlement.
4. The sales forecast for Division A assumes that the new Portsmouth facility will be complete and operating at 40 percent of capacity on February 1, 2015. It is highly improbable that the facility will be operational before January 2015. Each month's delay would reduce Division A sales by approximately $80,000 and operating earnings by $30,000.
Required: For each assumption, state the evidence sources and procedures you would use to determine the reasonableness of that assumption.