The selling price per unit is $40.00 December of the previous year 10,000 Januar

Question

The selling price per unit is $40.00

December of the previous year 10,000

January                                                40,000

February                                  60,000

March                                      100,000

April                                        70,000

Prepare a cash budget for January through March and for the first quarter in total. The company maintains a minimum cash balance of $50,000.00, and this was the balance in the cash account on January 1. Past experience shows that 30% of sales are collected in the month of the sale, and 70% in the month following the sale. Labor cost is $15 per unit. Other expenses include $17,000 per month for rent, $4,000 for advertising, and $6,000 per month for depreciation. All costs are paid in the current month except inventory purchases, which are paid in the month following purchase (i.e. January purchases are paid in February). On January 1st there was an outstanding accounts payable balance of $100,000. The company has an open line of credit with a bank and can borrow at an annual rate of 12%. For simplification assume that all loans are made at the beginning of the month and repayments are made at the end, and interest is only paid at the time when repayment is made. Additionally, all loans and repayments (not the interest portion) can only be made in increments of $1000 and the company would like to pay its debts, or a portion thereof, as soon as it has enough cash to do so.

Explanation / Answer

Answer:

Purchase Price per unit is not given in the question... It is assumed that Purchase Price per unit is $10 from outstanding balance of accounts payable on 1st January ($100,000 / 10,000 Units) = $10 per unit

Working Note

Note 1: Cash Collection from Customers

Note 3 : Depreciation is a non cash item and does not involve any cash payment so it is not considered while preparing cash budget.

Cash Budget January to March Particulars January February March Opening Cash Balance $50,000 $89,000 $608,000 Cash Receipt: Cash Collection from Customers (Note 1) $760,000 $1,840,000 $2,880,000 Total Cash available before financing and disbursement $810,000 $1,929,000 $3,488,000 Cash Payments/Disbursements: Payment for Inventory Purchases (Note 2) $100,000 $400,000 $600,000 Labour Cost $600,000 $900,000 $1,500,000 Rent $17,000 $17,000 $17,000 Advertising $4,000 $4,000 $4,000 Total Cash Payment / Disbursements $721,000 $1,321,000 $2,121,000 Increase / (Deficiency) of available cash balance over disbursements $89,000 $608,000 $1,367,000 Financing: Borrowing from Bank $0 $0 $0 Repayment of Borrowing $0 $0 $0 Interest Payment $0 $0 $0 Closing cash balance $89,000 $608,000 $1,367,000

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