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LPD Logistics, Inc.\'s projected sales for the first six months of 2010 are give

ID: 2613309 • Letter: L

Question

LPD Logistics, Inc.'s projected sales for the first six months of 2010 are given below.

            Jan.       $300,000           April       $350,000

            Feb.       $350,000           May         $500,000

            Mar.     $475,000           June         $400,000



20% of sales are collected in the month of the sale, 75% are collected in the month following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of sales. Purchases are made the month prior to the sales and are paid during the month the purchases are made (i.e. goods sold in March are bought and paid for in February). Total other cash expenses are $35,000/month. The company's cash balance as of February 1, 2010 will be $30,000. Excess cash will be used to retire short-term borrowing (if any). LPD has no short term borrowing as of February 28, 2010. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $20,000 at the beginning of each month. What is LPD's projected cumulative borrowing as of March 1, 2010?

Select one:

a. $110,000

b. -0-

c. $90,000

Explanation / Answer

correct option is "a" - 110,000

Cash collection = [350000*.20 + 300000*.75] =

                       = [70,000 +225,000]

                     =$ 295,000

cash payments:

Purchase : [475,000 march purchase *80%]

                = 380,000

other cash expenses = (35,000)

total cash payments = 415,000

net cash flow during the month = - 120,000           [295,000 -415,000]

add:beginning balance             =   30,000

balance at end                        = - 90,000

Desired balance                    = 20,000

so borrowings =   90000 +20000= 110,000