Cash budgets under two alternatives Each autumn, as a hobby, Pauline Spahr weave

Question

Cash budgets under two alternatives Each autumn, as a hobby, Pauline Spahr weaves cotton placemats to sell at a local craft shop. The mats sell for $20 per set of four mats. The shop charges a 10% commission and remits the net proceeds to Spahr at the end of December. Spahr has woven and sold 25 sets in each of the last two years. She has enough cotton in inventory to make another 25 sets. She paid $7 per set for the cotton. Spahr uses a four-harness loom that she purchased for cash exactly two years ago. It is depreciated at the rate of $10 per month. The accounts payable relate to the cotton inventory and are payable by September 30 Spahr is considering buying an eight-harness loom so that she can weave more intricate patterns in linen. The new loom costs $1,000; it would be depreciated at $20 per month. Her bank has agreed to lend her $1,000 at 6% interest, with $200 principal plus accrued interest payable each December 31. Spahr believes she can weave 15 linen placemat sets in time for the Christmas rush if she does not weave any cotton mats. She predicts that each linen set will sell for $50. Linen costs $18 per set. Spahr's supplier will sell her linen on credit, payable December 31 Spahr plans to keep her old loom whether or not she buys the new loom. The balance sheet for her weaving business at August 31 is as follows Spahr, Weaver Balance Sheet August 3 4 Assets S Current assets 6 Cash 7Inventory of cotton 8 Total current assets 175 Property, plant, and equipment o Loonm Accumulated depreciation 12 13 Total asses 14 15 6 Accounts payable 74 8 Total liabilities and sto Requirements 1. Prepare a combined cash budget for the four months ending December 31, for two alternatives: weaving the placemats in cotton using the existing loom and weaving the placemats in linen using the new loom. For each alternative, prepare a budgeted income statement for the four months ending December 31 and a budgeted balance sheet at December 31 2. On the basis of financial considerations only, what should Spahr do? Give your reason 3. What nonfinancial factors might Spahr consider in her decision?

Explanation / Answer

Pauline Spahr Cash Budget ending four month ending on December 31, 2017 Four Harness Loom Eight Harness Loom Four Harness Loom Eight Harness Loom Beginning Cash Balance 25 25 Receipt from Sales 450 675 Receipt from Sales Loan from Bank 1000 No. of set 25 15 Total Receipts 475 1700 Average price 20 50 500 750 Payment towards cotton 74 74 Less : Commission 50 75 Payment towards linen 270 450 675 Purchase of Eight Harness Loom 1000 Repayment of Loan principal 200 Payment of Interest on Loan 25 Interest on Loan =1000*6%*5/12 Total Payment 74 1569 25 Ending Cash balance 401 131 Budgeted Income statement for the four month ending December 31, 2017 Four Harness Loom Eight Harness Loom Revenue from sales 500 750 Less : Cost of goods sold 175 270 Depreication on Kiln 50 150 Interest on Loan 25 Commission on sales 50 75 Total expenses 275 520 Net Income 225 230 Balance sheet at December 31, 2017 Four Harness Loom Eight Harness Loom Four Harness Loom Eight Harness Loom Asset Accumulated depreication Cash 401 131 Beginning Balance 240 240 Inventory 0 175 Add : Depreciation on Wood Mizer KD 150 Total current Asset A 401 306 50 50 Property , Plant & Equipment 500 1500 Add : Depreciation on Wood Mizer KD 250 Less : Accumulated Depreciation 290 390 100 Total PP & E B 210 1110 290 390 Total Asset A+B 611 1416 Liabilities Current Liabilties Accounts Payable 0 0 Total Current Liabilties 0 0 Non Current liabilties Loans from Bank 800 Total Non current liabilties 800 Stockholder's equity Retained earnings Beginning 386 386 Add : Net Income 225 230 Total Liabilities & Stockholder's equity 611 1416 Requirement 2 On the basis of financial consideration, Spahr should go for Eight Harness Loom as it is giving more additonal Income Requirement 3 Non-Financial factor, Spahr should consider are as follows What she will do next year and on which loom Will she ever use her four harness loom again as she might start liking eight harness loom What she will do with her cotton Inventory, if she continue with Linen sets in future We appreciate the rating of our answers Thank You

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