The Carlquist Company makes and sells a product called Product K. Each unit of Product K sells for $24 dollars and has a unit variable cost of $18. The company has budgeted the following data for November: • Sales of $1,152,200, all in cash.
• A cash balance on November 1 of $48,000.
• Cash disbursements (other than interest) during November of $1,160,000.
• A minimum cash balance on November 30 of $60,000.
If necessary, the company will borrow cash from a bank. The borrowing will be in multiples of $1,000 and will bear interest at 2% per month. All borrowing will take place at the beginning of the month. The November interest will be paid in cash during November.
The amount of cash needed to be borrowed on November 1 to cover all cash disbursements and to obtain the desired November 30 cash balance is:

Question

Quizplus · Accepted Answer

First we need to calculate the cash collections in November based on the given sales and collection terms. We are given that all sales are in cash, so the cash collection in November will be the same as the sales amount of $1,152,200.

Next, we need to calculate the cash disbursements in November, which are given as $1,160,000.

Based on the above information, we can calculate the cash balance at the end of November as follows:

Beginning cash balance + cash collections - cash disbursements = ending cash balance
$48,000 + $1,152,200 - $1,160,000 = $40,200

However, we are also given that the company wants to maintain a minimum cash balance of $60,000 at the end of November. Therefore, the actual borrowing needed will be:

Desired ending cash balance - Ending cash balance = Borrowing needed
$60,000 - $40,200 = $19,800

We also know that borrowing will be in multiples of $1,000 and will bear interest at 2% per month. Therefore, the minimum borrowing needed will be the smallest multiple of $1,000 that is greater than or equal to $19,800. This amount is $20,000.

However, we also need to consider the interest payment on the borrowed amount during November. The interest payment will be calculated as:

Borrowing amount x interest rate x time
$20,000 x 0.02 x 1 = $400

Therefore, the total amount needed to be borrowed on November 1 to cover all cash disbursements and to obtain the desired November 30 cash balance is:

$20,000 + $400 = $21,000

So, the best choice is B.

The Carlquist Company Makes and Sells a Product Called Product