You have recently been hired by Piepkorn Manufacturing to work in its newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard boxes in a variety of sizes. Gary Piepkorn, the owner of the company, works primarily in the sales and production areas. Currently, the company puts all receivables in one shoe box and all payables in another. Because of the disorganized system, the finance area needs work, and thats what you have been brought in to do.

The company currently has a cash balance of $240,000 and plans to purchase new box folding machinery in the fourth quarter at a cost of $445,000. The purchase of the machinery will be made with cash because of the discount offered. The companys policy is to maintain a target cash balance of $125,000. All sales are in cash and all purchases are made on credit.

Gary Piepkorn has projected the following gross sales for each of the next four quarters:

Gross sales for the first quarter of next year are projected at $1,290,000. Piepkorn currently has an accounts receivable balance of $630,000. Twenty percent of the accounts receivable balance is from a company that has just entered bankruptcy, and it is likely that this portion of the accounts receivable balance will never be collected.

Piepkorn typically orders 50 percent of next quarters projected gross sales in the current quarter, and suppliers are typically paid in 42 days. Wages, taxes, and other costs run about 30 percent of gross sales. The company has a quarterly interest payment of $130,000 on its long-term debt.

The company uses a local bank for its short-term financial needs. It pays 1.5 percent per quarter on all short-term borrowing and maintains a money market account that pays 1 percent per quarter on all short-term debt.

Gary has asked you to prepare a cash budget and short-term financial plan for the company under the current policies. He has also asked you to prepare additional plans based on changes in several inputs.

Questions

1. Use the numbers given to complete the cash budget and short-term financial plan. (already answered)

2. Rework the cash budget and short-term financial plan assuming Piepkorn changes to a target balance of $100,000 (already answered)

3. You have looked at the credit policy offered by your competitors and have determined that the industry standard credit policy is 1/10, net 40.*The discount will begin to be offered on the first day of the first quarter. You want to examine how this credit policy would affect the cash budget and short term financial plan. If this credit policy is implemented, you believe that 40 percent of all sales will take advantage of it, and the accounts receivable period will decline to 36 days. Rework the cash budget and short term financial plan under the new credit policy and a minimum cash balance of $100,000. What interest rate are you effectively offering customers?

4. You have talked to the companies suppliers, about the credit terms Piepkorn recieves. currently, the company recieves terms of net 45. the suppliers have stated that they would offer new credit terms of 1.5/15 net 40. the discount would begin to be offered on the first day of the first quarter. what interest rate are the suppliers offering the company? ework the cash budget and short term financial plan assuming you take the credit terms on all orders and the minimum cash balance is $100,000. Also assume that Piepkorn offers the credit terms in the previous question.