Rawhide Outfitters had projected its sales for the first six months of 2012 to be as follows: Cost of goods sold is 60% of sales.Purchases are made and paid for two months prior to the sale.40% of sales are collected in the month of the sale,40% are collected in the month following the sale,and the remaining 20% in the second month following the sale.Total other cash expenses are $40,000/month.The company's cash balance as of March 1st,2012 is projected to be $40,000,and the company wants to maintain a minimum cash balance of $15,000.Excess cash will be used to retire short-term borrowing (if any exists).Fielding has no short-term borrowing as of March 1st,2012.Assume that the interest rate on short-term borrowing is 1% per month.How much short term financing is needed by March 30,2012?

Question

Rawhide Outfitters had projected its sales for the first six months of 2012 to be as follows:  Cost of goods sold is 60% of sales.Purchases are made and paid for two months prior to the sale.40% of sales are collected in the month of the sale,40% are collected in the month following the sale,and the remaining 20% in the second month following the sale.Total other cash expenses are $40,000/month.The company's cash balance as of March 1st,2012 is projected to be $40,000,and the company wants to maintain a minimum cash balance of $15,000.Excess cash will be used to retire short-term borrowing (if any exists).Fielding has no short-term borrowing as of March 1st,2012.Assume that the interest rate on short-term borrowing is 1% per month.How much short term financing is needed by March 30,2012?

Quizplus · Accepted Answer

To calculate the short term financing needed by March 30, 2012, we need to first calculate the total cash collections for each month and the total cash disbursements for each month.

Total cash collections for April (40% of March sales): 0.4 * $350,000 = $140,000
Total cash collections for May (40% of April sales): 0.4 * $440,000 = $176,000
Total cash collections for June (20% of April sales and 40% of May sales): (0.2 * $440,000) + (0.4 * $550,000) = $286,000

Total cash disbursements for April (cost of goods sold for February sales): 0.6 * $280,000 = $168,000
Total cash disbursements for May (cost of goods sold for March sales): 0.6 * $350,000 = $210,000
Total cash disbursements for June (cost of goods sold for April sales): 0.6 * $440,000 = $264,000
Total other cash expenses for each month: $40,000

Now, we can calculate the cash balance for each month:

Cash balance for March 1st: $40,000
Cash balance for March: $40,000 - $15,000 + $0 = $25,000 (no sales in March)
Cash balance for April: $25,000 + $140,000 - $168,000 - $40,000 = -$43,000
Cash balance for May: -$43,000 + $176,000 - $210,000 - $40,000 = -$117,000
Cash balance for June: -$117,000 + $286,000 - $264,000 - $40,000 = -$135,000

Since the cash balance for April is negative, Rawhide Outfitters will need to borrow to cover the shortfall. The maximum amount of borrowing needed will be equal to the minimum cash balance requirement of $15,000 plus the negative cash balance of -$43,000, or $58,000. However, since the company wants to maintain a minimum cash balance of $15,000, the actual amount of borrowing needed will be $85,000 (=$58,000 - $15,000). Therefore, the correct answer is D) $85,000.

Rawhide Outfitters Had Projected Its Sales for the First Six