LPD Logistics, Inc.\'s projected sales for the first six months of 2010 are give
ID: 2640067 • 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
c. $70,000
d. -0-
Explanation / Answer
step1:
cash collection in febuary = 350000 * 20% + 75% * 300000 = 295,000
step2:
cost of goods sold = 475000 * 80% = 380,000
other csah expenses = 35000
cash balance = 30,000
minimum cash balance required = 20,000
step3:
net cash flow at the end of febuarary
= 295000 - 380000 -35000 + 30000 - 200000
= -110,000
so, the above amount should be borrowed as it doesnot have necessary funds to process its functions
so
projected cumulative borrowings as of march = 110,000
hence a is the answer
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