Abacus Company sells Its product for $170 per unit. Its actual and projected sal

Question

Abacus Company sells Its product for $170 per unit. Its actual and projected sales follow. All sales are on credit. Recent experience shows that 24% of credit sales is collected in the month ofthe sale. 46% in the month after the sale. 25% in the second month after the sale, and 5% proves to be uncollectible The product s purchase price is $110 per unit. All purchases are payable within 12 days. Thus. 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 23% of the next month's unit sales plus a safety stock of 65 units The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,656,000 and are paid evenly throughout the year in cash. The company's minimum cash balance at month-end is $84,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $84,000. the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 13% interest rate On May 31. the loan balance is $31,500. and the company's cash balance is $84,000.

Explanation / Answer

Answer 1. Cash Collection of Credit Sales (Accounts Receivables) From Sales in Total % Collected June July April      1,445,000 25%        361,250 May          680,000 46%        312,800 25%         170,000 June      1,275,000 24%        306,000 46%         586,500 July          850,000 24%         204,000 Total Collected        980,050         960,500 Answer 2. Budgeted Ending Inventories (In Units) April May June July Next Month Budgeted Sales               4,000               7,500             5,000              3,800 Ratio of Inventory to Future Sales 23% 23% 23% 23% Budgeted 'base' ending Inventory                  920               1,725             1,150                  874 Plus Safety Stock                     65                     65                   65                    65 Budgeted Ending Inventory                  985               1,790             1,215                  939 Answer 3. Abacus Company Merchandise Purchase Budget For May, June & July May June July Sales In Units               4,000               7,500             5,000 Add: Ending Inventory               1,790               1,215                 939 Total Need               5,790               8,715             5,939 Less: Inventory at the beginning                (985)             (1,790)           (1,215) Purchases during the Month               4,805               6,925             4,724 Purchase Cost per Unit                  110                   110                 110 Total Purchase Cost          528,550           761,750        519,640 Answer 4. Cash Payment on Product Purchases (For June & July) From Purchases in Total % Paid June July May          528,550 40%        211,420 June          761,750 60%        457,050 40%         304,700 July          519,640 60%         311,784 Total Paid        668,470         616,484 Answer 5. Abacus Company Cash Budget June July Balance at the Beginning            84,000           225,739 Cash Collected from Accounts Receivables          980,050           960,500 Total Cash available from operations      1,064,050       1,186,239 Less: Cash Disbursements Merchandise Purchases        (668,470)        (616,484) Selling & Admn. Exp.        (138,000)        (138,000) Total Disbursement        (806,470)        (754,484) Excess cash avail over disburse & Invest.          257,580           431,755 Financing: Bank Loan                      -   Repayment of Bank Loan            31,500                      -   Interest on Bank Loan                  341                      -   Total Financing            31,841                      -   Net Cash Balance Closing          225,739           431,755

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