Problem:
Victoria Kite Company, a small Melbourne Firm that sells kites in the web wants a master budget for the next three months, beginning January 1, 2005. It desires an ending minimum cash balance of $5,000 each month. Sales are forecasted at an average wholesale selling price of $8 per kite. In January Victoria Kite is beginning just in time (JIT) deliveries from suppliers, which means that purchases equal expected sales.
On Jan.1 purchases will cease until inventory reaches $6,000 after which time purchases will equal sales. Merchandise cost average $4 per kite. Purchases during any given month are paid in full during the following month. All sales on credit, payable within 30 days, but experience has shown that 60% of current sales are collected in the current month, 30% in the next month and 10% in the month thereafter. Bad debts are negligible.
Monthly operating expenses are as follows:
Wages and salary: $15,000
Insurance expired: $125
Depreciation: $250
Masc.: $2,500
Rent: $250/month + 10% of quarterly sales over $10,000
Cash dividends of $1,500 are to be paid quarterly, starting Jan 15, and are declared on the fifteenth of the previous month. All operating expenses are to be paid as incurred, except insurance, depreciation and rent. Rent of $250 is to be paid each month, and the additional 10% of sales is paid quarterly on the tenth of the moth following the wnd of the quarter. The next settlement is due Jan. 10
The company plans to buy some new fixtures for $3000 cash in March.
Money can be borrowed and repaid in multiples of $500 at an interest rate of 10% per annum. Management wants to minimize borrowing and repay rapidly Interest is computed and paid when the principle is repaid. Assume that the borrowing occurs at the beginning and the repayments at the end of the months in question. Money is never borrowed at the beginning and repaid at the end of the same month. Compute interest to the nearest dollar.
assets as of December 31,2004 liabilities as of December 31, 2004
cash $5000 accts payable (merchandise) $35,000
accts receivable 12,500 dividends payable 1,500
inventory* 39,050 rent payable 7,800
unexpired insurance 1,500
fixed assets, net 12,500
total $70,550 $44,850
*November 30 inventory balance=$16,000
Recent and forcasted sales
October $38,000
November $25,000
December $25,000
January $62,000
Feb $75,000
Mar. $38,000
Apr. $45,000
Problem 1. Prepare a master budget including a budget income statement, balance sheet, statement of cash receipts and disbursements, and supporting schedules for the nights of Jan - March 2005.
Problem 2. Explain why there is need for a bank loan and what operating sources provide the cash for the repayment of the bank loan.