MA48 Problem: Budgeting - Gowan Corporation

MA48 Problem: Budgeting - Gowan Corporation

The Gowan Corporation manufactures and distributes wooden baseball bats. This is a seasonal businesswith a large portion of its sales occurring in late winter and early spring. The production schedule for thelast quarter of the year is heavy in order to build up inventory to meet expected sales volume.The company experiences a temporary cash strain during this heavy production period. Payroll costs riseduring the last quarter because overtime is scheduled to meet the increased production needs. Collectionsfrom customers are low because the fall season produces only modest sales. This year the company'sconcern is intensified because prices are increasing during the current inflationary period. In addition, theSales Department forecasts sales of fewer than one million bats for the first time in three years. Thisdecrease in sales appears to be caused by the popularity of aluminum bats.The cash account builds up during the first and second quarters as sales exceed production. The excesscash is invested in Treasury bills and other commercial paper. During the last half of the year, thetemporary investments are liquidated to meet the cash needs. In the early years of the company, short-term borrowing was used to supplement the funds released by selling investments, but this has not beennecessary in recent years. Because costs are higher this year, the treasurer asks for a forecast for December to judge if the $40,000 in temporary investments will be adequate to carry the companythrough the month with a minimum balance of $10,000. Should this amount ($40,000) be insufficient, shewants to begin negotiations for a short-term loan.The unit sales volume for the past two months and the estimate for the next four months are as follows:October (actual) 70,000 November (actual) 50,000December (estimated) 50,000January (estimated) 90,000

February (estimated) 90,000

March (estimated) 120,000

The bats are sold for $5 each. All sales are made on account. Half of the accounts are collected in themonth of the sale, 40% are collected in the month following the sale, and the remaining 10% in thesecond month following thesale. Customers who pay in the month of the sale receive a 2% cash discount.The production schedule for the six-month period beginning with October reflects the company's policyof maintaining a stable year-round work force by scheduling overtime to meet the following productionschedules:October (actual) 90,000 November (actual) 90,000December (estimated) 90,000January (estimated) 90,000

February (estimated) 100,000

March (estimated) 100,000

The bats are made from wooden blocks that cost $6 each. Ten bats can be produced from each block. The blocks are acquired one year in advance so they can be properly aged. Gowan pays the supplier one-