The Arkansas Company makes and sells a product called Product K. Each unit of Pr

Question

The Arkansas Company makes and sells a product called Product K. Each unit of Product K sells for $39 dollars and has a unit variable cost of $24. The company has budgeted the following data for November:

Sales of $1,302,200, all in cash.

A cash balance on November 1 of $64,500.

Cash disbursements (other than interest) during November of $1,310,000.

A minimum cash balance on November 30 of $92,000.

If necessary, the company will borrow cash from a bank. The borrowing will be in multiples of $1,000 and will bear interest at 2% per month. All borrowing will take place at the beginning of the month. The November interest will be paid in cash during November.
The amount of cash needed to be borrowed on November 1 to cover all cash disbursements and to obtain the desired November 30 cash balance is:

Explanation / Answer

Opening cash balance $         64,500 Add: cash from sales $   1,302,200 Less: Cash disbursments $ (1,310,000) Cash balance before borrowings $         56,700 Minimum balance to be maintained $         92,000 Borrowings ($92,000 - $56,700)/98*100 $   36,020.41

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