The actual sales and purchases for White Inc. for September and October 2009, along with its forecast sales and purchases for November 2009 through April 2010, follow.
|
Year
|
Month
|
Sales
|
Purchases
|
|
2009
|
September
|
$310,000
|
$220,000
|
|
2009
|
October
|
350,000
|
250,000
|
|
2009
|
November
|
270,000
|
240,000
|
|
2009
|
December
|
260,000
|
200,000
|
|
2010
|
January
|
240,000
|
180,000
|
|
2010
|
February
|
280,000
|
210,000
|
|
2010
|
March
|
300,000
|
200,000
|
|
2010
|
April
|
350,000
|
190,000
|
The firm makes 30 percent of all sales for cash and collects 35 percent of its sales in each of the two months following the sale. Other cash inflows are expected to be $22,000 in September and April, $25,000 in January and March, and $37,000 in February. The firm pays cash for 20 percent of its purchases.
It pays for 40 percent of its purchases in the following month and for 40 percent of its purchases two months later. Wages and salaries amount to 15 percent of the preceding month's sales. Lease expenses of $30,000 per month must be paid. Interest payments of $20,000 are due in January and April. A principal payment of $50,000 is also due in April.
The firm expects to pay a cash dividend of $30,000 in January and April. Taxes of $120,000 are due in April. The firm also intends to make a $55,000 cash purchase of fixed assets in December.
a. Assuming that the firm has a cash balance of $42,000 at the beginning of November and its desired minimum cash balance is $25,000, prepare a cash budget for November through April.
b. If the firm is requesting a line of credit, how large should the line be? Explain your answer.