Question

Lapps Inc. makes a gift product that sells best during the holiday season. Retailers stock up in the fall, so Lapps's sales are largest in October and November and drop dramatically in December. The firm expects the following revenue pattern for the second half of this year ($000). The third quarter figures are actual results, while the fourth quarter is a projection. Jul Aug Sep Oct Nov Dec Revenue $5,500 $6,000 $7,500 $8,000 $9,500 $4,000 Historically, Lapps collects its receivables according to the following pattern. Months after sale 1 2 3 % collected 60% 30% 9% The firm offers a 2% prompt payment discount, which is taken by about half of the customers that pay in the first month. Lapps receives inventory one month in advance of sales. The cost of material is 40% of revenue. Invoices are paid 45 days after receipt of material. The firm uses temporary labor to meet its seasonal production needs, so payroll can be estimated at 35% of the current month's sales. Other expenses are a constant $1.8 million per month. A $.7 million tax payment is scheduled for November, and an expansion project will require cash of $.5 million in October and $.8 million in December. Lapps has a $6 million short-term loan outstanding at the end of September. Monthly interest is 1% of the previous month-end balance. Prepare Lapps's cash budget for the fourth quarter.

PLEASE SHOW EQUATIONS

Answer 1

Lapp's Cash budget for fourth quarter

Cash receipts :	October	November	December
Cash collection from customers (working note 1)	6750000	7542000	8718000
Total cash available (A)	6850000	7542000	8718000
Cash payments
Payment to supplier (working note2)	3200000	3800000	1600000
Payment to labour	2800000 (35% of 8000000)	3325000 (35% of 9500000)	1400000 (35% of 4000000)
Other expenses paid	1800000	1800000	1800000
Tax payment	0	700000	0
Expansion	500000	0	800000
Interest payment	60000
Total payments (B)	8360000	9625000	5600000

Working notes

1 .Cash collection from customers

Particulars	july	august	september	october	november	december
Sales	5500000	6000000	7500000	8000000	9500000	4000000
Collections
After 1 month (without discount)	-	3300000 (5500000x60%)	3600000 (6000000x60%)	4500000 (7500000x60%)	4800000 (8000000x60%)	5700000 (4800000x60%)
Less discount		33000 (3300000x1/2)x2%	36000 (36000000x1/2)x2%	45000 (4500000x1/2)x2%	48000 (4800000x1/2)x2%	57000 (5700000x1/2)x2%
A After 1 month (after deducting discount)		3267000	3564000	4455000	4752000	5643000
B After 2 months	-	-	1650000 (5500000x30%)	1800000 (6000000x30%)	2250000 (7500000x30%)	2400000 (8000000x30%)
C After 3 months	-	-	-	495000 (5500000x9%)	540000 (6000000x9%)	675000 (7500000x9%)
Total (A+B+C)		3267000	5214000	6750000	7542000	8718000

2. Cash payment for material

Particulars	july	august	September	october	november	december
Sales	5500000	6000000	7500000	8000000	9500000	4000000
Inventory requirement	2400000 (40% of 6000000)	3000000 (40% of 7500000)	3200000 (40% of 8000000)	3800000 (40% of 9500000)	1600000 (40% of 4000000)
Cash payment after 45 days)	-	2400000	3000000	3200000	3800000	1600000