Jamison Company\'s financial managers are meeting with the company\'s bank to re
ID: 2796422 • Letter: J
Question
Jamison Company's financial managers are meeting with the company's bank to renew their line of credit and discuss their investment needs. They have prepared the company's operating cash budget for the last six months of the year. The following budget assumptions were used to construct the budget: Jamison's total sales for each month were first calculated in the sales budget and are reflected on the first ine of the cash budget. · Jamison's sales are made on credit with terms of 2/10, net 30. Jamison's experience is that 25% is collected from customers who take advantage of the discount, 65% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts. · The cost of materials averages 50% of Jamison's finished product. The purchases are generally made one month in advance of the sale, and Jamison pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,320 million, then purchases during June would be $660 ($1,320 millionx 0.50), and this amount would be paid in July. · Other cash expenses include wages and salaries at 19% of sales, monthly rent of $48 million, and other expenses at 5% of sales. Estimated tax payments of $70 million and $73 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,200 million payment for a new plant must be made in September Assume that Jamison's targeted cash balance is $200, and the estimated cash on hand on July 1 is $230. Use the preceding information to fill in the missing amounts in the following cash budget.Explanation / Answer
Cash Budget (All figures in $ millions):
Credit Purchases for July =$1212x0.50=$606
Cash Receipt collections for Jul Sales in July =$1200x0.25 =$300
Cash Receipt collections for Jun Sales in July =$1176x0.65 =$764
Cash Receipt collections for May Sales in July =$1140x0.10 =$114.00
Total Cash Receipts=$300+764+114=$1,178
Payment for Credit Purchases for Oct =$630
Wages and Salaries for October =$0.19x1260=$239.40
Rent for October =$48
Other Expenses for October=$0.05x1260=$63
Taxes for October =$73
Payment for Plant Construction in October=$0
Total Cash Disbursements for October =$1053
Ending Cash Balance for September=$-952+646=$-306
Target(minimum) cash balance for September = $200
Surplus (Shortfall) for September =$(-306)-200 =$-506
Fill in the Blanks
In the last 6 months of the year, Jamison will require $ 306 million to end the year with a cash surplus of $500 million and a cash surplus of $500 million if Jamison company will want a credit line of at least $200 million to cover the month with the greatest shortfall, and the financial managers can tell the bank to expect that they will be able to invest upto $300 million in short term marketable securities.
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