Question

Martin Company expects to have a cash balance of $135,000 on January 1, 2017. Relevant monthly budget data for the first 2 months of 2017 are as follows:

• Collections from customers: January $246,500, February $435,000.
• Payments for direct materials: January $155,000, February $240,000
• Direct labor: January $90,000, February $135,000. Wages are paid in the month they are incurred.
• Manufacturing overhead: January $63,000, February $75,000. These costs include depreciation of $5,000 per month. All other overhead costs are paid as incurred.
• Selling and administrative expenses: January $45,000, February $60,000. These costs are exclusive of depreciation. They are paid as incurred.
• Sales of marketable securities in January are expected to realize $36,000 in cash. Martin Company has a line of credit at the local bank that enables it to borrow up to $75,000. The company wants to maintain a minimum monthly cash balance of $60,000.

Instructions

(a)        Prepare a cash budget for January and February.

(b)        Martin Company’s chief financial officer feels that it is important to have data for the entire quarter especially since their financial forecasts indicate some difficult economic periods in the coming year.   March information has been budgeted as follows:

• Collections from customers: $375,000
• Payments for direct materials: $206,000
• Direct labor: Wages paid in March $116,000
• Manufacturing overhead: $64,500. This includes the monthly depreciation of $5,000.
• Selling and administrative expenses: $51,600. This cost is exclusive of depreciation.
• Marketable securities of $50,000 can be sold if needed for additional cash.

1. Prepare a cash budget for March assuming that the company does not sell the marketable securities.
2. What is the maximum amount the company can borrow during March? Does this provide the company with an adequate ending cash balance?
3. How much does the company need to borrow if the marketable securities are sold?
4. Comment on the status of the company’s cash budget for March.

Answer 1

Bridgeport Housewares Inc
Cash Budget
		January	February
A	Beginning cash balance	$   1,35,000.00	$       69,500.00
B	Cash receipts
	Collection from customers	$   2,46,500.00	$    4,35,000.00
	Sales of marketable securities	$       36,000.00
	Loan taken		$       60,500.00
C = A+B	Total cash available	$   4,17,500.00	$    5,65,000.00
	Cash payments
	Direct Materials	$   1,55,000.00	$    2,40,000.00
	Direct Labour	$       90,000.00	$    1,35,000.00
	Manufacturing OH	$       58,000.00	$       70,000.00
	Selling and Admin OH	$       45,000.00	$       60,000.00
	Loan Repayment
D	Total Cash Payments	$   3,48,000.00	$    5,05,000.00
E = C-D	Ending Cash balance	$       69,500.00	$       60,000.00

Bridgeport Housewares Inc
Cash Budget
		January	February	March
A	Beginning cash balance	$   1,35,000.00	$       69,500.00	$       60,000.00
B	Cash receipts
	Collection from customers	$   2,46,500.00	$    4,35,000.00	$   3,75,000.00
	Sales of marketable securities	$       36,000.00
	Loan taken		$       60,500.00
C = A+B	Total cash available	$   4,17,500.00	$    5,65,000.00	$   4,35,000.00
	Cash payments
	Direct Materials	$   1,55,000.00	$    2,40,000.00	$   2,06,000.00
	Direct Labour	$       90,000.00	$    1,35,000.00	$   1,16,000.00
	Manufacturing OH	$       58,000.00	$       70,000.00	$       59,500.00
	Selling and Admin OH	$       45,000.00	$       60,000.00	$       51,600.00
	Loan Repayment
D	Total Cash Payments	$   3,48,000.00	$    5,05,000.00	$   4,33,100.00
E = C-D	Ending Cash balance	$       69,500.00	$       60,000.00	$         1,900.00

What is the maximum amount the company can borrow during March? = $14,500

Does this provide the company with an adequate ending cash balance? No

How much does the company need to borrow if the marketable securities are sold?

Balance after sale of securities = Current Balance + Sale value =$1,900 + $50,000 = $51,900

Loan required = $60,000 - $51,900 = $8,100

Comment on the status of the company’s cash budget for March.

Business should sell securities and borrow loan inorder to maintain the minimum cash balance