Financial statement information is presented below for Hillary Corporation, a producer of mountain climbing gear. The company expects sales to increase by about 20% in 2004.

Hillary’s management is considering automating much of the company’s production process. The automation would result in about half of the company’s cost of goods sold being fixed. Currently, most of these costs vary in proportion to sales, as shown in the financial numbers presented above.

Required

A. Assume that half ($231 million) of Hillary’s cost of goods sold in 2003 is fixed and that the other half increases in proportion to sales, an increase of 20%. Compute the company’s expected cost of goods sold.

B. Using the same assumptions as part A, compute expected net income for 2004. Assume that income taxes are 35% of pretax income. Round to the nearest million.

C. Compare your results with those presented above, which assume that cost of goods sold varies in proportion to sales. What effect would the automation have on Hillary’s profitability? What effect would it have on the company’s risk? Explain your answer.

Speelman v. Pascal

FACTS In 1952, the estate of George Bernard Shaw granted to Gabriel Pascal Enterprises, Limited, the exclusive rights to produce a musical play and a motion picture based on Shaw’s play Pygmalion. The agreement contained a provision terminating the license if Gabriel Pascal Enterprises did not arrange for well-known composers, such as Lerner and Loewe, to write the musical and produce it within a specified period of time. George Pascal, owner of 98 percent of Gabriel Pascal Enterprises’ stock, attempted to meet these requirements but died in July 1954 before negotiations had been completed. In February 1954, however, while the license had two years yet to run, Pascal had sent a letter to Kingman, his executive secretary, granting to her certain percentages of his share of the profits from the expected stage and screen productions of Pygmalion. Subsequently, Pascal’s estate arranged for the writing and production of the highly successful My Fair Lady, based on Shaw’s Pygmalion. Kingman then sued to enforce Pascal’s gift assignment of the future royalties. The trial court entered judgment for Kingman.

DECISION Judgment for Kingman affirmed.

OPINION Assignments of rights to sums that are expected to become due to the assignor are enforceable. To make a gift of such an assignment, the donor need only demonstrate a present intent to transfer irrevocably his right to the donee. Although at the time of the delivery of the letter there was no musical play or motion picture in existence, Pascal’s letter was intended to transfer irrevocably by assignment a percentage of the royalties from the future productions to Kingman. Therefore, the assignment is enforceable as a valid gift.

INTERPRETATION A gratuitous assignment becomes irrevocable upon the assignor’s making an effective delivery of the assignment to the assignee.

CRITICAL THINKING QUESTION Should the law enforce assignments of contractual rights not in existence at the time of the assignment? Explain.