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# 7/5/2003

## Chapter 22. Solution to Ch 22 P18 Build a Model

Input Data
Collections during month of sale
Collections during month after sale
Collections during second month after sale
Lease payments
Target cash balance
General and administrative salaries
Depreciation charges
Income tax payments (Sep & Dec)
Miscellaneous expenses
New design studio payment
Cash on hand July 1
Minimum cash balance

10%
75%
15%
\$9,000
\$90,000
\$27,000
\$36,000
\$63,000
\$2,700
\$180,000
\$132,000
\$90,000

## Sales, labor, and RM adjustment factor

Original sales estimates
Original labor and raw mat. estimates
Collections and purchases worksheet
Sales (gross)
Collections
During month of sale
During 1st month after sale
During 2nd month after sale
Total collections
Purchases
Labor and raw materials
Payments for labor and raw materials

## Note: When the percent collected

during the second month after sale
is changed, the percent for
collections during month after sale
is automatically changed so that
100% of sales are collected during
the three-month period.

0%
May
\$180,000
\$90,000

June
\$180,000
\$90,000

July
\$360,000
\$126,000

August September
\$540,000
\$720,000
\$882,000
\$306,000

\$180,000

\$180,000

\$360,000

\$540,000

\$720,000

\$360,000

\$360,000

\$90,000

36000
135000
27000
\$198,000

54000
270000
27000
\$351,000

72000
405000
54000
\$531,000

36000
540000
81000
\$657,000

36000
270000
108000
\$414,000

9000
270000
54000
\$333,000

\$126,000
\$90,000

\$882,000
\$126,000

\$306,000
\$882,000

\$234,000
\$306,000

\$162,000
\$234,000

\$90,000
\$162,000

\$90,000

\$90,000

## October November December

\$360,000 \$360,000
\$90,000
\$234,000 \$162,000
\$90,000

January
\$180,000

\$180,000

## Cash gain or loss for month

Collections
Payments for labor and raw materials
General and administrative salaries
Lease payments
Miscellaneous expenses
Income tax payments
Design studio payment
Total payments
Net cash gain (loss) during month
Loan requirement or cash surplus
Cash at start of month
Cumulative cash
Target cash balance
Cumulative surplus cash or loans
outstanding to maintain \$90,000 target cash balance
Max. Loan

\$198,000
90,000
27,000
9,000
2,700

\$351,000
126,000
27,000
9,000
2,700

\$531,000
882,000
27,000
9,000
2,700
63,000

\$657,000
306,000
27,000
9,000
2,700

\$414,000
234,000
27,000
9,000
2,700

\$333,000
162,000
27,000
9,000
2,700
63,000

\$128,700
\$69,300

\$164,700
\$186,300

\$983,700
\$452,700

180,000
\$524,700
\$132,300

\$272,700
\$141,300

\$263,700
\$69,300

\$132,000
\$201,300
\$90,000

\$201,300
\$387,600
\$90,000

\$387,600
\$651,000
\$90,000

\$65,100
\$67,200
\$90,000

\$67,200
\$208,500
\$90,000

\$208,500
\$277,800
\$90,000

\$111,300

\$297,600

\$155,100

\$22,800

\$118,500

\$187,800

\$155,100

b. How much must Bowers borrow each month to maintain the target cash balance?
Answer. Just look at the "Cumulative surplus" line at the bottom of the cash budget.
c. Would the cash budget be accurate if inflows came in all during the month but outflows were bunched
early in the month?
No it would not be accurate. A daily cash budget would be necessary because not all payments would be noted.

d. If the company produces on a seasonal basis. How would this affect the current ratio and the debt ratio?
Before the major seasonal movement, the company will not have many assets and little debt. As it begins to make more, it will begin to borrow more in order to finance.

e. If its customers began to pay late, this would slow down collections and thus increase the required loan amount. Also, if
sales dropped off, this would have an effect on the required loan. Do a sensitivity analysis that shows the effects of these two
factors on the max loan requirement. Assume the purchases of labor and raw material also vary by the sales adjustment factor.
Answer: The "Sales adjustment factor" can be used to cause sales to vary from the base levels. Similarly, we
can change the percentage of late paying customers. Here is the relevant data table:
Change
in Sales
\$155,100
-100%
-75%
-50%
-25%
0%
25%
50%
75%
100%

0%

15%

30%
45%
60%

75%

90%

\$ 496,200
\$ 318,450
\$ 148,800

\$ 496,200
\$ 325,200
\$ 189,300

\$ 496,200
\$ 331,950
\$ 229,800

\$ 496,200
\$ 338,700
\$ 270,300

\$ 496,200
\$ 345,450
\$ 310,800

\$ 496,200
\$ 353,550
\$ 351,300

\$ 496,200
\$ 473,800
\$ 391,800

\$ 110,100

\$ 150,600

\$ 191,100

\$ 231,600

\$ 288,300

\$ 349,050

\$ 409,800

\$ 101,100
\$ 92,100
\$ 83,100
\$ 741,000

\$ 155,100
\$ 159,600
\$ 164,100
\$ 168,600

\$ 209,100
\$ 227,100
\$ 245,100
\$ 263,100

\$ 263,100
\$ 2,946,000
\$ 326,100
\$ 357,600

\$ 317,100
\$ 362,100
\$ 407,100
\$ 452,100

\$ 371,100
\$ 429,600
\$ 488,100
\$ 546,600

\$ 427,800
\$ 497,100
\$ 569,100
\$ 641,100

\$ 65,100

\$ 173,100

\$ 281,000

\$ 389,100

\$ 497,100

\$ 605,100

\$ 713,100