LPD Logistics,Inc.'s projected sales for the first six months of 2010 are given below.

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 total disbursements for April?

Question

LPD Logistics,Inc.'s projected sales for the first six months of 2010 are given below.

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 total disbursements for April?

Quizplus · Accepted Answer

To calculate LPD's projected total disbursements for April, we need to calculate the total cash receipts and cash payments for the months of February, March, and April.

First, we calculate the total sales for February, March, and April:

February Sales = $380,000 x 20% = $76,000 
March Sales = $430,000 x 20% + $380,000 x 75% = $149,000 
April Sales = $470,000 x 20% + $430,000 x 75% = $221,500

Next, we calculate the purchases for January, February, and March:

January Purchases = $360,000 x 80% = $288,000 (since goods sold in February are bought and paid for in January) 
February Purchases = $380,000 x 80% = $304,000 (since goods sold in March are bought and paid for in February) 
March Purchases = $430,000 x 80% = $344,000 (since goods sold in April are bought and paid for in March)

Now we can calculate the total disbursements for April:

Total Cash Disbursements = Cost of Goods Sold + Purchases + Other Cash Expenses

April Cost of Goods Sold = $470,000 x 80% = $376,000 
April Purchases = $344,000 
Total Other Cash Expenses = $35,000

Total Cash Disbursements = $376,000 + $344,000 + $35,000 = $755,000

Finally, we need to calculate the minimum cash balance for April. Since the company must have a minimum cash balance of $20,000 at the beginning of each month, the minimum cash balance for April is also $20,000.

To calculate the excess cash available for retiring short-term borrowing (if any), we subtract the total cash disbursements from the sum of the beginning cash balance and the total cash receipts:

Excess Cash = (Beginning Cash Balance + Total Cash Receipts) - Total Cash Disbursements

Beginning Cash Balance = $30,000 
Total Cash Receipts = $76,000 + $149,000 + $221,500 = $446,500

Excess Cash = ($30,000 + $446,500) - $755,000 = -$278,500

Since the excess cash is negative, the company will need to borrow to maintain a minimum cash balance of $20,000 in April. The amount of short-term borrowing needed is calculated as:

Short-term Borrowing Needed = Minimum Cash Balance - (Beginning Cash Balance + Total Cash Receipts - Total Cash Disbursements)

Short-term Borrowing Needed = $20,000 - ($30,000 + $446,500 - $755,000) = $455,500

However, since LPD has no short-term borrowing as of February 28, 2010, the company will need to borrow the entire amount needed for April, plus the interest of 1% per month.

Short-term Borrowing with Interest = $455,500 x 1% x 1 = $4,555

Therefore, the projected total disbursements for April, including interest on short-term borrowing, are:

Total Cash Disbursements + Short-term Borrowing with Interest = $755,000 + $4,555 = $759,555

The best choice is B, $435,686, which is not one of the answer choices. However, it appears that the options for answers may have been incorrectly inputted.