Problem - Retail outlets purchase snowboards from SB, Inc. throughout the year. However, in anticipation of late summer and early fall purchases, outlets ramp up inventories from May through August. Outlets are billed when boards are ordered. Invoices are payable within 60 days. From past experience, SB's accountant projects 20% of invoices are paid in month invoiced, 50% are paid in the following month and 30% of invoices are paid two months after the month of invoice. The average selling price per snowboard is $450.
To meet demand, SB increases production from April through July, because the snowboards are produced a month prior to their projected sale. Direct materials are purchased in the month of production and are paid for during the following month (terms of sale are Net 30 days from invoice date). During this period there is no production for inventory, and no materials are purchased for inventory.
Direct manufacturing labor and materials are paid monthly. Variable manufacturing overhead is incurred at the rate of $7 per direct manufacturing labor-hour. Variable marketing costs are driven by the number of sales visits. However, there are no sales during the months studied. SB also incurs fixed manufacturing overhead costs of $5,500 per month and fixed nonmanufacturing costs of $2,500 per month.
Projected sales are 80 units in May, 120 in June, 200 in July, 100 in August, 60 in September, and 40 in October.
Direct materials and direct labor utilization and cost
Units per board Price per unit Unit
Wood 5 $30 Board feet
Fiberglass 6 $ 5 Yard
Direct manufacturing labor 5 $ 25 Hour
The beginning cash balance for July 1, 2010 is $10,000. On October 1, 2009, SB had a cash crunch and borrowed $30,000 on a 6% one year note with interest paid monthly. This note is due 10/1/10.
1. Prepare a cash budget for the months of July through September 2010. Show supporting schedules for the calculation of receivables and payables.
2. Will SB be in a position to pay off the $30,000 note due 10/1/10? If not, what actions would you recommend to SB's management?
3. Suppose SB is interested in maintaining a minimum cash balance of $10,000. Will the company be able to maintain such a balance during all three months analyzed?