Question

1. The following information pertains to Monroe Company:

                              Month                   Sales                 Purchases
                              January                 $62,000                $33,000
                              February              $84,000                $42,000
                             March                     $101,000          $61,000

• Cash is collected from customers in the following manner:
                 Month of sale                               40%
                 Month following the sale      60%
• 45% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.
• Labor costs are 30% of sales. Other operating costs are $38,000 per month (including $10,000 of depreciation). Both of these are paid in the month incurred.
• The cash balance on March 1 is $8,000. A minimum cash balance of $6,000 is required at the end of the month. Money can be borrowed in multiples of $1,000.

How much cash will be disbursed in total in March?

Answer 1

Solution:

The amount to be disbursed in total in March which includes payment for purchases and other expenses is $1,08,850.

Also, the company has a borrowed a loan of $73,000 in the month of January, February and March to meet the deficit.

Cash Budget For the Month of January, February and March

	January	February	March
Opening Balance	8,000.00	6,350.00	6,900.00
Receipts
Total Collection from Sales (Working Note 1)	24,800.00	70,800.00	90,800.00
	32,800.00	77,150.00	97,700.00
Payments
Total Payment for Purchases (Working Note 2)	14,850.00	37,050.00	50,550.00
Total Payment of Expenses (Working Note 3)	46,600.00	53,200.00	58,300.00
Total Payments	61,450.00	90,250.00	1,08,850.00
Surplus / (Deficit)	(28,650.00)	(13,100.00)	(11,150.00)
Loan from Bank	35,000.00	20,000.00	18,000.00
Closing Balance	6,350.00	6,900.00	6,850.00

Note: Depreciation being non-cash expenditure, will not be considered as a payment.

Amount of Loan to be taken in January = Deficit + Minimum Balance

                                                               = $28,650 + $6,000 = $34,650

As the amount of loan is available in multiples of 1000, the loan amount is $35,000           

Amount of Loan to be taken in February = Deficit + Minimum Balance

                                                               = $13,100 + $6,000 = $19,100

As the amount of loan is available in multiples of 1000, the loan amount is $20,000

Amount of Loan to be taken in March = Deficit + Minimum Balance

                                                               = $11,150 + $6,000 = $17,150

As the amount of loan is available in multiples of 1000, the loan amount is $18,000

Working Note 1: Collection from Sales:

	January	February	March
Sales	62,000.00	84,000.00	1,01,000.00
Collection of Sales:
40% in Month of Sale	24,800.00	33,600.00	40,400.00
60% of the Previous Month's Sale		37,200.00	50,400.00
Total Collection from Sales	24,800.00	70,800.00	90,800.00

Working Note 2: Payment for Purchases:

	January	February	March
Purchases	33,000.00	42,000.00	61,000.00
Payment for Purchases:
45% Payment in the same month	14,850.00	18,900.00	27,450.00
55% Payment of the previous Month's purchases		18,150.00	23,100.00
Total Payment for Purchases	14,850.00	37,050.00	50,550.00

Working Note 3: Payment for other expenses:

	January	February	March
Labour Costs	18,600.00	25,200.00	30,300.00
Other Operating Costs (Excluding Depreciation $10,000)	28,000.00	28,000.00	28,000.00
Payment of Expenses	46,600.00	53,200.00	58,300.00