Question

Harry’s Carryout Stores has eight locations. The firm wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm can present an acceptable three-month financial plan for January through March. The following are actual and forecast sales figures:

Actual			Forecast			Additional Information
November	$280,000		January	$360,000		April forecast	$380,000
December	300,000		February	400,000
			March	390,000

Of the firm’s sales, 40 percent are for cash and the remaining 60 percent are on credit. Of credit sales, 50 percent are paid in the month after sale and 50 percent are paid in the second month after the sale. Materials cost 40 percent of sales and are purchased and received each month in an amount sufficient to cover the following month’s expected sales. Materials are paid for in the month after they are received. Labor expense is 30 percent of sales and is paid for in the month of sales. Selling and administrative expense is 15 percent of sales and is paid in the month of sales. Overhead expense is $21,000 in cash per month.

Depreciation expense is $10,400 per month. Taxes of $8,400 will be paid in January, and dividends of $4,000 will be paid in March. Cash at the beginning of January is $88,000, and the minimum desired cash balance is $83,000.

A. Prepare a schedule of monthly cash payments for January, February, and March.

B. Prepare a monthly cash budget with borrowings and repayments for January, February, and March. (Negative amounts should be indicated by a minus sign. Assume the January beginning loan balance is $0.)

Answer 1

Sales budget	Jan	Feb	Mar.	Total	April
Sales budgeted	360000	400000	390000	1150000	380000
Cash sales(40%)	144000	160000	156000	460000
Credit sales(60%)	216000	240000	234000	690000
Sales Collections
Cash sales(40%)	144000	160000	156000	460000
Credit sales of:
Nov.(280000*60%*50%)	84000			84000
Dec.(300000*60%*50% each)	90000	90000		180000
Jan.(216000*50%;50%)		108000	108000	216000
Feb.(240000*50%)			120000	120000
Total cash collections	318000	358000	384000	1060000
Materials cost budget
Material cost for the mth.'s sales(40%*sales)	144000	160000	156000	460000
A.A schedule of monthly cash payments for January, February, and March.
Payment for:
Materials(Recd. prev. mth. & paid this mth.)	144000	160000	156000	460000
Labor(sales*30%)	108000	120000	117000	345000
S&A exp.(sales*15%)	54000	60000	58500	172500
OH exp.	21000	21000	21000	63000
Taxes	8400			8400
Dividends			4000	4000
Total cash disbursements	335400	361000	356500	1052900
B. Cash Budget
Beginning balance	88000	83000	83000	88000
Cash collections	318000	358000	384000	1060000
Total cash available	406000	441000	467000	1148000
Less: Cash disbursements	335400	361000	356500	1052900
Surplus/(Deficit)	70600	80000	110500	95100
Add: Borrowings	12400	3000		15400
Less: Repayments			-15400	-15400
Ending balance	83000	83000	95100	95100