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Homework answers / question archive / Terrel Manufacturing expects stable sales through the summer months of June, July, and August of $500,000 per month
Terrel Manufacturing expects stable sales through the summer months of June, July, and August of $500,000 per month. The firm will make purchases of $350,000 per month during these months. Wages and salaries are estimated at $60,000 per month plus 7 percent of sales. The firm must make a principal and interest payment on an outstanding loan in June of $100,000. The firm plans a purchase of a fixed asset costing $75,000 in July. The second quarter tax payment of $20,000 is also due in June. All sales are for cash. Construct a cash budget for June, July, and August, assuming the firm has a beginning cash balance of $100,000 in June. (b) The sales projections may not be accurate due to the lack of experience by a newly- hired sales manager. If the sales manager believes the most optimistic and pessimistic estimates of sales are $600,000 and $400,000, respectively, what are the monthly net cash flows and required financing or excess cash balances? Make vour recommendations.
Cash Budget of Terrel Manufacturing | |||
For the months of June, July and August | |||
( Amount in $) | |||
Particulars | June | July | August |
Cash balance at the beginning of the month | 100000 | 135000 | 250000 |
Cash Inflows | |||
Cash Sales | 500000 | 500000 | 500000 |
Total Cash Inflows | 600000 | 635000 | 750000 |
Cash Outflows | |||
Purchases | 350000 | 350000 | 350000 |
Wages & Salaries | 95000 | 95000 | 95000 |
Principal and Interest Payment of Loan | 100000 | 0 | 0 |
Purchase of Fixed Asset | 0 | 75000 | 0 |
Tax Payment | 20000 | 0 | 0 |
Total Cash Outflows | 565000 | 520000 | 445000 |
Cash Surplus / (Deficit) | 35000 | 115000 | 305000 |
Cash Balance at the end of month | 135000 | 250000 | 555000 |
Cash Budget of Terrel Manufacturing (In Most Optimistic Case) | |||
For the months of June, July and August | |||
( Amount in $) | |||
Particulars | June | July | August |
Cash balance at the beginning of the month | 100000 | 158000 | 319000 |
Cash Inflows | |||
Cash Sales | 600000 | 600000 | 600000 |
Total Cash Inflows | 700000 | 758000 | 919000 |
Cash Outflows | |||
Purchases | 420000 | 420000 | 420000 |
Wages & Salaries | 102000 | 102000 | 102000 |
Principal and Interest Payment of Loan | 100000 | 0 | 0 |
Purchase of Fixed Asset | 0 | 75000 | 0 |
Tax Payment | 20000 | 0 | 0 |
Total Cash Outflows | 642000 | 597000 | 522000 |
Cash Surplus / (Deficit) | 58000 | 161000 | 397000 |
Cash Balance at the end of month | 158000 | 319000 | 716000 |
Cash Budget of Terrel Manufacturing (In Most Pessimistic Case) | |||
For the months of June, July and August | |||
( Amount in $) | |||
Particulars | June | July | August |
Cash balance at the beginning of the month | 100000 | 112000 | 181000 |
Cash Inflows | |||
Cash Sales | 400000 | 400000 | 400000 |
Total Cash Inflows | 500000 | 512000 | 581000 |
Cash Outflows | |||
Purchases | 280000 | 280000 | 280000 |
Wages & Salaries | 88000 | 88000 | 88000 |
Principal and Interest Payment of Loan | 100000 | 0 | 0 |
Purchase of Fixed Asset | 0 | 75000 | 0 |
Tax Payment | 20000 | 0 | 0 |
Total Cash Outflows | 488000 | 443000 | 368000 |
Cash Surplus / (Deficit) | 12000 | 69000 | 213000 |
Cash Balance at the end of month | 112000 | 181000 | 394000 |
Notes:
1.) Purchases are calculated on the basis of sales.
In optimistic case - where sales is taken as $ 600000
Purchases = $ 350000 * $ 600000 / $ 500000
= $ 420000
In pessimistic case - where sales is taken as $ 400000
Purchases = $ 350000 * $ 400000 / $ 500000
= $ 280000
2.) Wages and salaries are $ 60000 plus 7% of sales per month
In normal case - where sales is $ 500000 per month
Wages & salaries = $ 60000 + ( $ 500000 * 7%)
= $ 60000 + $ 35000
= $ 95000
In Optimistic case - where sales is $ 600000 per month
Wages & salaries = $ 60000 + ( $ 600000 * 7%)
= $ 60000 + $ 42000
= $ 102000
In Pessimistic case - where sales is $ 400000 per month
Wages & salaries = $ 60000 + ( $ 400000 * 7%)
= $ 60000 + $ 28000
= $ 88000