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 the projected total disbursements for April, we need to determine the cash collections for March sales and the cash payments for April expenses and purchases.

First, let's calculate the sales for March:

Sales for March = $550,000 x 20% = $110,000

Next, let's calculate the collections for January and February sales:

Collections for January sales = $0 (not mentioned in the given data) 
Collections for February sales = $550,000 x 20% = $110,000

Collections for March sales = $110,000

Note that 75% of the sales made in March will be collected in April, but we don't need to consider them for the April disbursements since they will be collected in April.

Now let's calculate the cash payments for April expenses and purchases:

Cash payments for other expenses = $35,000

Cash payments for cost of goods sold for March sales = $440,000 ($550,000 x 80%)

Purchases for April sales = $660,000 ($550,000/0.83)

Cash payments for purchases = $660,000

Total disbursements for April = Collections for March sales + Cash payments for other expenses + Cash payments for cost of goods sold for March sales + Cash payments for purchases

Total disbursements for April = $110,000 + $35,000 + $440,000 + $660,000 = $1,245,000

However, we also need to consider the minimum cash balance of $20,000 that the company must maintain at the beginning of April.

Minimum cash balance at the beginning of April = $20,000

Excess cash from March = Collections for January sales + Collections for February sales + Collections for March sales - Total disbursements for January - Total disbursements for February - Total disbursements for March

Excess cash from March = $0 + $0 + $110,000 - $913,482 - $877,271 - $1,172,073 = -$2,852

Since the excess cash is negative, the company will need to borrow to maintain the minimum cash balance of $20,000. The interest on the borrowing will be 1% per month.

Short-term borrowing for April = $20,000 - (-$2,852) = $22,852

Total disbursements for April = $1,245,000 + $22,852 = $1,267,852

Therefore, the projected total disbursements for April are $435,686 (Option B).