Question: Today is January 1. Bozo's Bakery, makers of Smack-in-the-Face Cream Pies, is examining next year's sales forecasts to determine if it will be necessary to take out any short-term loans from their bank. The sales forecasts for the next few months are:
December 50,000 units January 40,000 February 35,000 March 45,000 April 50,000
Each pie sells for $3, and since Bozo's is a wholesaler all sales are made on credit. It is expected that 20% of each month's sales will be collected during that month and that the other 80% will be collected the following month (no bad debts).
Each month's production is 100% of that month's expected sales. The cost of ingredients for the next year will be $2.00 per pie, an increase of 20 cents over last year's costs. Raw materials sufficient for each month's production are purchased during that month and paid for 30 days later. Direct labor is ten cents per pie. Variable overhead has been calculated to be fifteen cents per pie. Labor and variable overhead are paid for in the month when they are incurred.
Selling and administrative expenses are budgeted to be 5% of sales and are paid for in the month incurred. Depreciation expense is $5,000 per month. The cash on hand as of January 1 is $15,000, and this is the minimum balance that will sustain operations. Bozo's holds no marketable securities nor plans to buy any; any cash in excess of the minimum is held as cash until July 31 or December 31 when it is declared as dividends to the stockholders. Whenever a loan is taken to cover cash needs, it is repaid as quickly as possible from subsequent cash operating flows. Bozo's will be purchasing a new pie making machine in January which will be paid for in February at a cost of $100,000. Tax payments of $10,000 will be made in January and April. Prepare the cash budget for the next quarter for Bozo's.
a) Calculate the cash collections for January.
b) Calculate total cash disbursements for February.
c) For February, will Bozo's have to borrow any money from the bank and, if so, how much?
d) What will be the Accounts Payable balance on the March 31 balance sheet?