Thompson Manufacturing Supplies' 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).Thompson 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 Thompson's projected total receipts (collections)for March?

Question

Thompson Manufacturing Supplies' 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).Thompson 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 Thompson's projected total receipts (collections)for March?

Quizplus · Accepted Answer

- March sales: $400,000
- 20% collected in March: $80,000
- 75% collected in April: $240,000
- 5% uncollectible: $20,000
- Total collections in March: $80,000 + $240,000 - $20,000 = $300,000
- Minimum cash balance required: $20,000
- Total cash needed in March: $35,000 other cash expenses + $240,000 cost of goods sold (80% of sales) + $20,000 purchases (made in February) = $295,000
- Starting cash balance: $30,000
- Short-term borrowing needed: $295,000 - $30,000 - $20,000 (minimum cash balance) = $245,000
- Interest on short-term borrowing: 1% x $245,000 = $2,450
- Total cash needed in March including interest: $295,000 + $2,450 = $297,450
- Projected total receipts (collections) for March: $300,000
- Excess cash: $300,000 - $297,450 = $2,550
- Short-term borrowing retired: $2,550
- Final cash balance: $20,000 (minimum required)

Thompson Manufacturing Supplies' Projected Sales for the First Six Months