Question

Nolan Johnson is CFO for a newly formed furniture manufacturing company. Below is the anticipated monthly production for the first year of operation, and beyond. Nolan is interested in learning which of the first twelve months will require cash outlays of more than $100,000 toward the purchase of lumber.

Each unit requires 20 board feet of lumber at $5.80 per board foot. All lumber is purchased in the month prior to its expected use. Lumber purchases are paid for 10% in the month of purchase, 40% in the month following the month of purchase, and 50% in the second month following the month of purchase.

Month Units

January 0

February 800

March 500

April 1,200

May 700

June 900

July 300

August 600

September 800

October 1,300

November 400

December 400

January 600

Which months will require cash outlays in excess of the $100,000 amount? Does the production in any given month necessarily correspond to the cash flow for that same month? What are the business implications of your observation?

Answer 1