Finance problems 3

Assignment 3

NOTE: Be sure to show all calculations to receive credit and follow the Assignment Instructions.

1. (6 points) Austin Braggard is very excited because sales for his nursery and plant company are

expected to double from $650,000 to $1,300,000 next year. He notes that net assets (Assets —

Liabilities) will remain at 50 percent of sales. His firm will enjoy an 8 percent return on total sales.

He will start the year with $120,000 in the bank and is bragging about the Jaguar and luxury

townhouse he will buy. Does his optimistic outlook for his cash position appear to be correct?

Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and

subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit.

2. (4 points) Alan Planner expects the sales for his clothing company to be $1,550,000 next year. He

notes that net assets (Assets – Liabilities) will remain unchanged. His clothing firm will enjoy a 12

percent return on total sales. He will start the year with $350,000 in the bank. What would the

ending cash balance be?

3. (5 points) Arrow Life Jackets Company had sales of 150,000 units at $35 per unit last year. The

marketing manager projects a 20 percent increase in unit volume sales this year with a 20 percent

price decrease. Returned merchandise will represent 4 percent of total sales. What is the net dollar

sales projection for this year?

4. (5points) Archie’s Plumbing Company has beginning inventory of 18,500 units, projects sales of

55,000 units for the month, and desires to maintain ending inventory at 25 percent of projected

sales. How many units should be produced?

5. (5 points) On December 31 of last year, Audio Technology Corporation had an inventory of 450

units of its product, which cost $220 per unit to produce. During January, the company produced

850 units at a cost of $250 per unit. Assuming that the Corporation sold 800 units in January, what

was the cost of goods sold? (Assume FIFO inventory accounting.)

6. (10 points) AAA Supplies produces a product with the following costs as of July 1, 2015:

Material ......................... $ 6

Labor ............................. 4

Overhead ....................... 3

$13

Beginning inventory at these costs on July 1 was 5,000 units. From July 1 to December 1, the

company produced 15,000 units. These units had a material cost of $10 per unit. The costs for labor

and overhead were the same. The company uses FIFO inventory accounting.

Assuming that the company sold 17,000 units during the last six months of the year at $20 each,

what would gross profit be? What is the value of ending inventory?

7. (45 points) Andres Electronics Company’s actual sales and purchases for April and May are shown

here, along with forecasted sales and purchases for June through September.

Sales Purchases

April (actual) .................................... $370,000 $155,000

May (actual) ..................................... 350,000 145,000

June (forecast) .................................. 325,000 145,000

July (forecast) .................................. 325,000 205,000

August (forecast) ............................. 340,000 225,000

September (forecast) ........................ 380,000 220,000

The company makes 22 percent of its sales for cash and 78 percent on credit. Of the credit

sales, 60 percent are collected in the month after the sale, and 40 percent are collected two months

later. The company pays for 20 percent of its purchases in the month after purchase and 80 percent

two months after.

Labor expense equals 17 percent of the current month’s sales. Overhead expense equals

$12,500 per month. Bond interest payments of $27,500 are due in June and September. A cash

dividend of $52,500 is scheduled to be paid in June. Tax payments of $25,500 are due in June and

September. There is a scheduled capital outlay of $350,000 in September.

The company’s ending cash balance in May is $22,500. The minimum desired cash balance is

$10,000. The maximum desired cash balance is $50,000. Excess cash (above $50,000) is used to

buy marketable securities. Marketable securities earn an annual interest rate of 6% (.5% monthly)

(on the previous month’s Cumulative Marketable Securities value) and are sold before borrowing

funds on the company’s established Line Of Credit (LOC) in case of a cash shortfall (less than

$10,000).

Prepare a schedule of monthly cash receipts (12 POINTS), monthly cash payments (12

POINTS), and a complete monthly cash budget (12 POINTS) with LOC borrowing and

repayments for June through September. Use the tables in the text as a template for completing

this problem (be sure to consider the cash sales in the receipts schedule). Round all numbers to

the nearest dollar.

Discuss Archer’s forecasting. What did you learn (6 POINTS)? What seems to be the most

important consideration in preparing the forecast (3 POINTS)?