James Buchanan Orthotics and Prosthetics is planning to request a line of credit
ID: 2739975 • Letter: J
Question
James Buchanan Orthotics and Prosthetics is planning to request a line of credit from its bank. The company has produced sales estimates, and these appear in the worksheet below. Collection estimates are as follows: 10 percent within the month of sale, 75 percent in the month following the sale, and 15 percent in the second month following the sale. Labor and supplies estimates also appear in the worksheet below. Payments for labor and supplies are typically made during the month following the one in which these costs have been incurred. General and administrative salaries will amount to approximately $27,000 a month; lease payments under long-term lease contracts will be $9,000 a month; depreciation charges will be $36,000 a month; miscellaneous expenses will be $2,700 a month; income tax payments of $63,000 will be due in both September and December; and a progress payment of $180,000 on a new building must be paid in October. Cash on hand on July 1 will amount to $132,000, and a minimum cash balance of $90,000 will be maintained throughout the cash budget period. What loan will be the company require inOctober?
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May June July August September October November December January Collections worksheet: Billed charges $180,000 $180,000 $360,000 $540,000 $720,000 $360,000 $360,000 $90,000 $180,000 Collections Within 30 days 30-60 days 60-90 days Total collections Supplies worksheet: Amount of labor and supplies $90,000 $90,000 $126,000 $882,000 $306,000 $234,000 $162,000 $90,000 Payments made for labor and supplies Net cash gain (loss): Total collections Total purchases General and administrative salaries Lease payments Miscellaneous expenses Taxes Progress payment Total payments Net cash gain/loss Borrowing/surplus summary: Cash at beginning with no borrowing Cash at end with no borrowing Target cash balance (given) Cumulative surplus cash / loan balanceExplanation / Answer
collection within 30 days will only include the 10% amount within the month of sale. The 30-60 days bracket will include the 75% amount that is collected in the month following the sale and the 60-90 days bracket will have the balance 15% amount that is collected in the second month following the sale. For instance, billed charges for May = 180,000. 10% of this = 18,000 will be in the 30 days bracket, 75% of this i.e. 135,000 will be in the 30-60 days bracket and the balance 15% or 27,000 will be in the 60-90 days barcket.
Labor expenses in May = 90,000. This will be paid next month i.e June.
Depreciation is a non cash expense and hence will not be included in the table. Net cash gain = collections - payments. If payments>collections there will be a loss.
Cash at end (without borrowing) = cash at beginning+net cash gain (loss). Thus cash on July 1 = 132,000. Cash gain in July = 69,300. Cash at end = 132,000+69,300 = 201,300. This is greater than the target of 90,000 and no borrowing is required. In the month of september, opening cash = 387,600. cash loss = 452,700. cash at the end = 387,600 - 452,700 = -65,100. Thus borrowing = target - cash at end = 90,000 - (-65,100) = 155,100.
Surplus cash = cash at end - target of 90,000. borrowing = 90,000 - cash at end (this happens when cash at end<90,000)
No borrowing is required in October as cash at the end of October is greater than 90,000. Borrowing is required only in the month of September.
May June July August September October November December January Billed charges 180,000 180,000 360,000 540,000 720,000 360,000 360,000 90,000 180,000 Collections Within 30 days 18,000 18,000 36,000 54,000 72,000 36,000 36,000 9,000 18,000 30-60 days 135,000 135,000 270,000 405,000 540,000 270,000 270,000 67,500 60-90 days 27,000 27,000 54,000 81,000 108,000 54,000 54,000 Total collections 18,000 153,000 198,000 351,000 531,000 657,000 414,000 333,000 139,500 Labor and supplies 90,000 90,000 126,000 882,000 306,000 234,000 162,000 90,000 Payments made for labor and supplies 90,000 90,000 126,000 882,000 306,000 234,000 162,000 90,000 Total collections 18,000 153,000 198,000 351,000 531,000 657,000 414,000 333,000 139,500 LESS: Total purchases 0 90,000 90,000 126,000 882,000 306,000 234,000 162,000 90,000 General and adminsitrative expenses 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000 Lease payments 9,000 9,000 9,000 9,000 9,000 9,000 9,000 9,000 9,000 Misc expenses 2,700 2,700 2,700 2,700 2,700 2,700 2,700 2,700 2,700 Taxes 63,000 63,000 Progress payment 180,000 Total payments 38,700 128,700 128,700 164,700 983,700 524,700 272,700 263,700 128,700 Net cash gain/loss (20,700) 24,300 69,300 186,300 (452,700) 132,300 141,300 69,300 10,800 Borrowing/surplus summary Cash at beginning with no borrowing 132,000 201,300 387,600 90,000 222,300 363,600 Cash at end with no borrowing 201,300 387,600 -65,100 222,300 363,600 432,900 Target 90,000 90,000 90,000 90,000 90,000 90,000 90,000 Cumulative surplus cash/loan balance 111,300 408,900 253,800 386,100 659,700 1,002,600Related Questions
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