Question

Use the following information for questions 5 and 6.

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Prince George's favorite toy is a wooden fire truck created by a small company in London, and given to him by his great-grandmother. Seeing an opporitunity, a local business man has incorporated the Prince George Toy Company to wholesale the toy to retailers throughout the United Kingdom. He purchases the truck at $4.00 per unit and sells it at wholesale for $10.00 per toy. With the Christmas season coming up, the company expects the following pattern of sales into the new year:

	Sales
	Dollars	Units
September	$8,000	800
October	12,000	1,200
November	18,000	1,800
December	14,000	1,400
January	6,000	600

Q6. Cash Disbursements

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Because the supplier is local, Prince George Company is able to keep a minimum inventory on hand. Their closing inventory balance at the end of any month should be half of the sales for the next month. Inventory at the beginning of October is 800 units.

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Purchases from the manufacturer are paid over a two-month period. 40% of purchases are paid in the month of purchase and 60% are paid in the month following purchase. In addition, they pay a commission to their sales force of 6.0% of sales (paid in the month of sale).

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Finally, the company pays monthly rent of $4,000 and expenses depreciation of $1,600 per month. They will have a one-time payment of dividends in December amounting to $35,000.

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1. Compute how many toys need to be purchased in October, November and December

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	October	November	December
Merchandise purchases (in units)

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2. Complete the following schedule of payments.

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Monthly Cash Payments
(enter as positive numbers)	November	December
Merchandise purchases
Rent
Depreciation
Commission
Dividends
Total payments	$	$

Answer 1

Calculation for number of toys to be purchased and cash payment is calculated below:

A.
Calculate number of toys to be purchased in each month
	October	November	December
Sales in units	1200	1800	1400
Add: Ending inventory	900	700	300
	(1800*50%)	(1400*50%)	(600*50%)
Total units required	2100	2500	1700
Less: Beginning inventory	800	900	700
No of toys to be purchased	1300	1600	1000
Prepare schedule for payment for purchases
	October	November	December
No of toys purchased	1300	1600	1000
Costs per unit	4	4	4
Value of purchased	$5,200	$6,400	$4,000
Purchases paid same month - 40%		$2,560	$1,600
		6400*40%	4000*40%
Purchases paid next month - 60%		$3,120	$3,840
		5200*60%	6400*60%
Total cash payment		$5,680	$5,440
Prepare schedule for payment
	November	December
Merchandise purchases	$5,680	$5,440
Rent	$4,000	$4,000
Depreciation	$0	$0
Commission (18,000*6%; 14,000*6%)	$1,080	$840
Dividend		$35,000
Total payment	$10,760	$45,280
Depreciation is non-cash expense and thus not considered to calculate total cash payment