The sales forecast for your firm for 2014 is $9.1 million. The cost of processin
ID: 2727754 • Letter: T
Question
The sales forecast for your firm for 2014 is $9.1 million. The cost of processing (production) is 50% of sales. Sales and administrative expenses are $100,000 per month. A close look at the sales forecast shows a strong seasonal pattern. The strongest sales months are February, March, April, and May. January $600,000 July $80,000 February $1,000,000 August $70,000 March $2,000,000 September $60,000 April $3,000,000 October $60,000 May $2,000,000 November $60,000 June $100,000 December $70,000 Sales are 50% cash sales and 50% credit sales; 80% of the monthly credit sales is received as cash one month following the month of sale. The remaining 20% of credit sales is received as cash the second month following the month of sale. As a result of computer processing equipment operating lease obligations, the firm’s processing costs are uniform throughout the year (annual processing costs are uniformly spread over twelve months). The firm’s cash management policy requires the firm to maintain a minimum cash balance of $200,000. The firm’s board of directors decided that in November 2014 it would pay-out a dividend of $ 500,000. Taxes of $ 200,000 will be paid per quarter (in March, June, September, and December). A capital outlay of $750,000 will be made in both March and April. You have had a running discussion with the Chief Financial Officer (CFO) as to the best way meet anticipated monthly cash shortfalls. The CFO believes in conservative cash management it opts for long-term financing. This entails financing the firm’s cash requirements with an annual long-term loan at 10%, which is based on covering the highest monthly cash shortfall. The unused portion of acquired funds will be fully invested on a monthly basis at a 6% (annual) interest rate. You believe a more cost effective approach would be to finance the firm’s cash requirements through a revolving credit agreement at a cost of .5% (annual rate) of the monthly-unused portion of the credit line. The used portion of the credit line will cost 5% (annual rate). Determine who is right
Explanation / Answer
According to CFO, As at the end of 1st month we have a deficit of $300,000 we will borrow $300,000 at 10%
Since we would not have any loan outstanding for the year we will give .5% annual interest rate on $300,000 for 9 months since we are not using that amount anymore
Difference between fixed and revolving loan
Particulars January February March April May June July August September October November December Total Cash Balance at beginning of each month $ - $ 300,000 $ 238,700 $ 197,194 $ 798,679 $ 1,905,673 $ 2,515,701 $ 2,465,480 $ 2,216,017 $ 1,758,277 $ 1,494,224 $ 725,345 Monthly sales $ 600,000 $ 1,000,000 $ 2,000,000 $ 3,000,000 $ 2,000,000 $ 100,000 $ 80,000 $ 70,000 $ 60,000 $ 60,000 $ 60,000 $ 70,000 $ 9,100,000 Cash Sales $ 300,000 $ 500,000 $ 1,000,000 $ 1,500,000 $ 1,000,000 $ 50,000 $ 40,000 $ 35,000 $ 30,000 $ 30,000 $ 30,000 $ 35,000 $ 4,550,000 Credit Sales $ 300,000 $ 500,000 $ 1,000,000 $ 1,500,000 $ 1,000,000 $ 50,000 $ 40,000 $ 35,000 $ 30,000 $ 30,000 $ 30,000 $ 35,000 $ 4,550,000 Amount received in following month of credit sales 80% of Credit Sales $ - $ 240,000 $ 400,000 $ 800,000 $ 1,200,000 $ 800,000 $ 40,000 $ 32,000 $ 28,000 $ 24,000 $ 24,000 $ 24,000 $ 3,612,000 Amount received in 2nd month of credit sales 20% of Credit Sales 0 0 $ 60,000 $ 100,000 $ 200,000 $ 300,000 $ 200,000 $ 10,000 $ 8,000 $ 7,000 $ 6,000 $ 6,000 $ 897,000 Net Cash Flow per month $ 300,000 $ 740,000 $ 1,460,000 $ 2,400,000 $ 2,400,000 $ 1,150,000 $ 280,000 $ 77,000 $ 66,000 $ 61,000 $ 60,000 $ 65,000 $ 9,059,000 Cost of Production = 50% of total Production $ 300,000 $ 500,000 $ 1,000,000 $ 1,500,000 $ 1,000,000 $ 50,000 $ 40,000 $ 35,000 $ 30,000 $ 30,000 $ 30,000 $ 35,000 $ 4,550,000 Sales and Administration Expenses per month $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 1,200,000 Dividend Payout $ 500,000 $ 500,000 Taxes $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 800,000 Capital Outlay $ 750,000 $ 750,000 $ 1,500,000 Access or deficit $ (100,000) $ 440,000 $ 398,700 $ 997,194 $ 2,098,679 $ 2,705,673 $ 2,655,701 $ 2,407,480 $ 1,952,017 $ 1,689,277 $ 924,224 $ 455,345 Minimum Cash Per month $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 Unused cash = ending - minimum cash $ (300,000) $ 240,000 $ 198,700 $ 797,194 $ 1,898,679 $ 2,505,673 $ 2,455,701 $ 2,207,480 $ 1,752,017 $ 1,489,277 $ 724,224 $ 255,345Related Questions
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