CraftCo,Inc.'s projected sales for the first six months of 2012 are given below:

40% of sales are collected in cash at time of sale,50% are collected in the month following the sale,and the remaining 10% are collected in the second month following the sale.Cost of goods sold is 60% of sales.Purchases are made in the month prior to the sales,and payments for purchases are made in the month of the sale.Total other cash expenses are $40,000/month.The company's cash balance as of February 28,2012 will be $25,000.Excess cash will be used to retire short-term borrowing (if any).CraftCo,Inc.has no short term borrowing as of February 28,2012.Assume that the interest rate on short-term borrowing is 1% per month.The company must have a minimum cash balance of $15,000 at the beginning of each month.What is CraftCo,Inc.'s projected cash balance at the end of March 2012?

Question

CraftCo,Inc.'s projected sales for the first six months of 2012 are given below:

40% of sales are collected in cash at time of sale,50% are collected in the month following the sale,and the remaining 10% are collected in the second month following the sale.Cost of goods sold is 60% of sales.Purchases are made in the month prior to the sales,and payments for purchases are made in the month of the sale.Total other cash expenses are $40,000/month.The company's cash balance as of February 28,2012 will be $25,000.Excess cash will be used to retire short-term borrowing (if any).CraftCo,Inc.has no short term borrowing as of February 28,2012.Assume that the interest rate on short-term borrowing is 1% per month.The company must have a minimum cash balance of $15,000 at the beginning of each month.What is CraftCo,Inc.'s projected cash balance at the end of March 2012?

Quizplus · Accepted Answer

First, let's calculate the total collections from sales for March:
Cash collected at time of sale: 40% * $450,000 = $180,000
Cash collected in the month following sale: 50% * $675,000 = $337,500
Cash collected in second month following sale: 10% * $450,000 = $45,000
Total collections from sales for March: $180,000 + $337,500 + $45,000 = $562,500

Now, let's calculate the cash disbursements for March:
Cost of Goods Sold: 60% * $450,000 = $270,000
Payments for Purchases: $405,000 (since purchases are made in the month prior to sales)
Total Cash Disbursements: $270,000 + $405,000 + $40,000 (other cash expenses) = $715,000

Next, let's calculate the minimum required cash balance for March. Since the company must have a minimum cash balance of $15,000 at the beginning of each month, the minimum required cash balance for March is also $15,000.

Now, we can calculate the projected cash balance at the end of March:
Beginning Cash Balance (February 28, 2012): $25,000
Total Collections from Sales: $562,500
Total Cash Disbursements: -$715,000
Minimum Required Cash Balance: -$15,000
Net Cash Flow: $562,500 - $715,000 - $15,000 = -$167,500

Since the net cash flow is negative, the company will need to borrow money to maintain the required minimum cash balance. The interest rate on short-term borrowing is 1% per month. Therefore, the interest expense for March would be:
Interest Expense = 1% * $15,000 = $150

Adding the interest expense to the net cash flow, we get:
Projected Ending Cash Balance: -$167,500 - $150 = -$167,650 = -$168,000 (rounded to nearest thousand)

However, since the company cannot have a negative cash balance, the projected ending cash balance for March would be $15,000 (the minimum required cash balance). Therefore, the best answer choice is B: $329,000.