134 Chapter 5 Operating Activities COMPREHENSIVE PROBLEM Rancho, Inc. forecasts

Question

134 Chapter 5 Operating Activities COMPREHENSIVE PROBLEM Rancho, Inc. forecasts the following sales for the second quarter of 2017, as well as actual March sales 2nd Q.Total March (actual) April May Jane 6,000 $15,000 s3, $4,000 85,000 In addition The company makes 60% cash sales and 40% credit sales . It collects all credit sales in the month after the sale The fim budgets $4.400 for monthly operating expenises. That amount includes $400 for depreciation. The firm pays all of its cash-based expenses in the month incurred Rancho, Inc. had $100 of cash at March 31, 2017, and it must maintain a minimum $500 cash balance at the end of every month to ensure liquidity The company has a line of credit with its bank that allows borrowing in $ 100 increments at 12% interest. All borrowing takes place at the beginning of the month in which the company requires cash. The company must repay principal in hundred dollar ncrements. · · The credit facility requires Rancho, Inc. to repay all accrued interest to date whenever it repays principal Principal repayments and interest payments occur at the end of a month (funds permitting) Required (Part 1) Develop monthly and quarterly short-term financing budgets for the second quarter of 2017 using the templates provided below Cash low Worksheet April May June 2nd Q Cash sales Credit sales collected Cash receipts Cash monthly payments Cash inflow (outflow) Short-Term Financing Budget May June 2nd Q Beginning cash balance Net cash fBow Available cash Borrowing needed Repayment of principal Payment of interest Net cash balance Use the sales forecasts from Part 1 above. Assume Rancho sells its only product for $10. The firm has monthly fixed costs of $600 and variable costs of $8 per unit

Explanation / Answer

1.

Interest repayment in May = $800 x 12% x 2/12 = $16

Interest repayment in June = $300 x 12% x 1/12 = $3

2a. Break-even point in units = Fixed costs/Contribution per unit = $600/($10 - $8) = $600/$2 = 300 units

Break-even point in dollars = Fixed costs/Contribution margin ratio = $600/20% = $3000

Contribution margin ratio = Contribution/Sales = ($10 - $8)/$10 = $2/$10 = 20%

2b.

Note: Monthly fixed costs of $600 are assumed to include monthly depreciation of $400.

2c.

Yes, Rancho should adopt the new cost structure as it would result in an increase in operating income.

Cash Flow Worksheet April May June 2nd Q Cash sales 2400 3000 3600 9000 Credit sales collected 1200 1600 2000 4800 Cash receipts 3600 4600 5600 13800 Cash monthly payments 4000 4000 4000 12000 Cash inflow (outflow) -400 600 1600 1800 Short-Term Financing Budget April May June 2nd Q Beginning cash balance 100 500 584 100 Net cash flow -400 600 1600 1800 Available cash -300 1100 2184 1900 Borrowing needed 800 0 0 800 Repayment of principal 0 -500 -300 -800 Payment of interest 0 -16 -3 -19 Net cash balance 500 584 1881 1881

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