The financial staff at Safe-Life Systems, Inc., an alarm systems manufacturer, has estimated the following sales and other expense figures for the second half of 2017:
1. Actual sales in June 2017 were $105,000. The firm sells 60% on cash, it collects 39% of the remainder one month after the sale, and 1% are written off as bad debts. Purchases are estimated to represent 55% of the next month’s sales. The firm pays 40% of its purchases in cash and the remainder during the following month. Commissions to sales associates represent 15% of collectable sales, but the firm has decided to include a bonus of 5% more if the sales of the current month are higher than the previous one. Each of the two partners is paid 20% of the average total sales of the previous and current month, plus a 5% bonus if the sales of the current month are higher than the previous one. Monthly wages, rent, and lease expenses are $5,000, $3,000, and $1,500, respectively. The firm has an ending cash balance of $25,000 in June 2017.
a) Create a cash budget for July to December 2017, and determine the firm’s ending cash balance in each month if the firm has a required minimum monthly cash balance of $25,000.
b) The partners are considering a line of credit from a commercial bank. Determine the amount that would be necessary to meet the total borrowing needs for July to December 2017. Round the result to the next highest $10,000.
c) Consider three scenarios. In the first scenario, monthly revenues are 5% better than expected, but cash sales are 40% of forecasted revenue, while credit sales are 58% and 2% are written off as bad debts. In the second scenario, sales are exactly as expected and the original collection policy is implemented. In the last scenario, sales are 5% worse than expected, but cash sales are 70% of forecasted revenue, while credit sales account for the remaining 30% with no bad debts. Use the Scenario Manager to determine the amount that the firm would need to borrow to maintain its minimum cash balance in all three scenarios.
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