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 receipts (collections)for March?

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 receipts (collections)for March?

Quizplus · Accepted Answer

Total projected sales for March = $400,000
20% of sales collected in March = $80,000
75% of sales collected in April = $300,000 x 75% = $225,000
5% of sales written off = $400,000 x 5% = $20,000
Total collections for March = $80,000 + $225,000 - $20,000 = $285,000

However, the company must have a minimum cash balance of $20,000 at the beginning of March. Therefore, the company will need to have total receipts of $305,000 ($20,000 minimum cash balance + $285,000 total collections) in March.

Since the projected total receipts for March is $305,000, none of the given choices are correct except for A which has the closest value. Therefore, the answer is A.