Question

1.A firm estimates sales of $250,000 in December, $275,000 in January; $225,000 in February, $300,000 in March, $350,000 in April; $280,000 in May; and $300,000 in June. November sales were $225,000. The firm typically collects 20% of its sales in cash; 50% are accounts receivable paid the month after the sale; and 30% are accounts receivable paid two months after the sale. The firm’s cost of goods sold (raw materials) amounts to 70% of its sales. The raw materials are ordered two months in advance of expected sales, but are paid for one month after they are ordered. The firm has fixed costs of $3,000 per month for rent and $12,000 per month for other fixed operating costs.   The firm has $30,000 per month in salary expense. Assume a starting cash balance of $0 but a minimum cash balance of $10,000 going forward. Prepare the cash budget for January through April. What is the maximum amount of short-term loan the firm will need during the relevant time period?

You may hand-write this part of the assignment and scan it to submit, or you may put it in Excel or Word to submit.

The Dawg Shop normally writes checks in the amount of $25,000 each day. It takes six days for these checks to clear. The firm receives checks in the amount of $22,000 daily but loses five days while they are being deposited and cleared. What is the firm’s disbursement float, collections float, and net float?

With its current system, it takes seven days from the time customers mail payments until The Wood Shed deposits them. A lockbox system would reduce this collection float by three days. If the Wood Shed receives an average of $3,000 in payments per day and its opportunity cost is 12%, how much should The Wood Shed be willing to pay each month for the lockbox system?

Compute the DSO (days sales outstanding) from the following aging schedule.

Account AgeAmount OutstandingAverage Days

0-30 days$75,00024

31-60 days$30,00040

Over 60 days$10,00065

5.The firm's average accounts receivable is $1,000,000 and is financed by a 7% annual interest bank loan. The firm is considering a regional lockbox system which it believes will reduce Accounts Receivable by 20 percent. The annual cost of the system is $20,000. What is the estimated net annual savings to the firm from implementing the lockbox system and should the firm use the system?

6.A firm’s average age of accounts receivable is 40 days. If the firm has annual sales of $650,000, what is the firm's average accounts receivable balance?

Answer 1

1)

	January	february	march	april
sales	67,500	75,000	82,500	67,500
	125,000	137,500	112,500	150,000
	55,000	45,000	60,000	70,000
less
purchase	-157,500	-210,000	-245,000	-196,000
	[225,00*70%[	[300,000*70%]	[350,000*70%]	[280,000*70%]
rent	-3000	-3000	-3000	-3000
salary	-30,000	-30,000	-30,000	-30,000
cash balance opening	-10,000	47,000	61,500	38,500
cash balance closing	47,000	61,500	38,500	97,000

workings ;

- sales november

reciept on jan = 225,000 *30% =67,500

-december

reciept on jan = 250,000* 50% =125,000

  reciept on feb = 250,000 * 30 % = 75,000

-january

reciept on jan =275,000 * 20% =55,000

  reciept on feb = 275,000 * 50% =137,500

  reciept on march = 275,000 * 30 % =82,500

-febraury

  reciept on feb = 225,000 * 20% = 45,000

reciept on march = 225,000 * 50% = 112,500

  reciept on april = 225,000 * 30% = 67,500

-march

  reciept on mar = 300,000 * 20% = 60,000

  reciept on apr = 300,000 * 50% = 150,000

-april

reciept on apr = 350,000* 20% = 70,000

  

5)

	Cost	Benefit
Annual cost	(20,000)
Savings on interest cost		14,000
[$1 million *20% *7%]	-------------- --------------------- net cost is $ 6,0000 ----------------------

6) Recievable days = recievables / sales * 365

40 days = recievables / $650,000*365

= $71,233