The LBJ Company has budgeted sales revenues as follows.
April May June
Credit sales $94,000 $89,500 $75,000
Cash sales 48,000 75,000 57,000
Total sales $142,000 $164,500 $132,000
Past experience indicates that 30% of the credit sales will be collected in the month of sale and the remaining 70% will be collected in the following month.
Purchases of inventory are all on credit; 40% is paid in the month of purchase and 60% in the month following purchase. Budgeted inventory purchases are $195,000 in April, $135,000 in May, and $63,000 in June.
Other budgeted cash receipts: (a) sale of plant assets for $33,000 in May, and (b) sale of new common stock for $50,000 in June. Other budgeted cash disbursements: (a) operating expenses of $15,000 each month, (b) selling and administrative expenses of $10,150 each month, (c) purchase of equipment for $35,000 cash in May, and (d) dividends of $20,000 will be paid in June.
The company has a cash balance of $20,000 at the beginning of May and wishes to maintain a minimum cash balance of $20,000 at the end of each month. An open line of credit is available at the bank and carries an annual interest rate of 10%. Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available. Also assume that there is no outstanding financing as of May 1.