Buster Enterprises' projected sales for the first six months of 2010 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 28,2010 will be $25,000.Excess cash will be used to retire short-term borrowing (if any).Buster Enterprises 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 $15,000 at the beginning of each month.What is Buster Enterprises' total cash disbursements for April 2010?

Question

Buster Enterprises' projected sales for the first six months of 2010 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 28,2010 will be $25,000.Excess cash will be used to retire short-term borrowing (if any).Buster Enterprises 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 $15,000 at the beginning of each month.What is Buster Enterprises' total cash disbursements for April 2010?

Quizplus · Accepted Answer

To calculate cash disbursements for April 2010, we need to consider the following:

1. Sales for April 2010: $420,000 (given in the table)
2. Cash collected at the time of sale (40% of sales): 0.4 x $420,000 = $168,000 (to be collected in April 2010)
3. Cash collected in the month following the sale (50% of sales): 0.5 x $420,000 = $210,000 (to be collected in May 2010)
4. Cash collected in the second month following the sale (10% of sales): 0.1 x $420,000 = $42,000 (to be collected in June 2010)
5. Total cash receipts for April 2010: $168,000 (from point 2 above)
6. Cost of goods sold (60% of sales): 0.6 x $420,000 = $252,000 (to be paid in April 2010)
7. Purchases made in March 2010: $378,000 (assume same as sales for April 2010)
8. Payments for purchases made in March 2010: $378,000 (to be paid in April 2010)
9. Other cash expenses: $40,000 (given in the question)
10. Minimum required cash balance: $15,000

Now, let's calculate the total cash disbursements for April 2010:

Cash disbursements = cash payments - cash receipts

Cash payments = cost of goods sold + payments for purchases + other cash expenses = $252,000 + $378,000 + $40,000 = $670,000

Cash receipts = $168,000 (from point 2 above)

Net cash disbursements = $670,000 - $168,000 = $502,000

To calculate whether the company needs to borrow any short-term funds:

Minimum required cash balance at the beginning of April 2010 = $15,000

Add: Excess cash balance as of February 28, 2010 = $25,000

Total required cash balance = $40,000

Since the net cash disbursements for April 2010 are greater than the required cash balance, the company will need to borrow some short-term funds.

The interest rate on short-term borrowing is given as 1% per month. So, the cost of short-term borrowing will be:

Cost of short-term borrowing = interest rate x amount of borrowing x time period = 1% x ($40,000 - $25,000) x 1 month = $150

Therefore, the total cash disbursements for April 2010 will be:

Total cash disbursements = net cash disbursements + cost of short-term borrowing = $502,000 + $150 = $502,150

The closest answer choice is B) $334,000.

Buster Enterprises' Projected Sales for the First Six Months of 2010