Question

Ponzi Products produced 112 chain-letter kits this quarter, resulting in a total cash outlay of $10 per unit. It will sell 56 of the kits next quarter at a price of $11, and the other 56 kits in the third quarter at a price of $12. It takes a full quarter for Ponzi to collect its bills from its customers. (Ignore possible sales in earlier or later quarters.) (Negative amount should be indicated by a minus sign.)

a. What is the net income for Ponzi next quarter?

b. What are the cash flows for the company this quarter?

c. What are the cash flows for the company in the third quarter?

d. What is Ponzi’s net working capital in the next quarter?

Answer 1

Solution:

a)Calcualtion of Net income for Ponzi next quarter

Net Income=Sale value-cost of goods sold

=($11*56)-($10*56)

=$56

b)Cash flow for the company

Quarter	1	2	3
Cash outlay for Production($10*112)	-$1120	0	0
Collection from customer	0	0	$616
Total cash flow	-$1120	0	$616

Thus cash flow for the company this quarter is -$1120(Negative).

c)Cash flows for the company in the third quarter is $616(i.e sale of 2nd quarter)

d)Ponzi’s net working capital in the next quarter

Quarter	1	2
Inventory	$10*112=$1120	(112-56)*$10=$560
Receivable(Collection due from customer)	0	56*$11=$616
Cash	0	0
Net working capital	$1120	$1176

Thus,Ponzi’s net working capital in the next quarter is $1176