Gary Raad recently opened a steel warehouse. Gary buys his steel only after he receives a firm

Question:

Gary Raad recently opened a steel warehouse. Gary buys his steel only after he receives a firm order from a customer; thus, Gary only buys what he sells in a particular month. Nevertheless, Gary projects that he will experience some cash flow problems toward the end of the year. While Gary is confident about the fundamentals of his business, he is wondering if he is perhaps too generous with his credit terms to customers.
Gary informs you that he currently collects 30% of revenues in the month after sale and the remaining 70% two months following the sale. Gary pays for 50% of his purchases in the month of purchase and 50% in the following month. His monthly fixed costs amount to $95,000, including $10,000 in noncash depreciation expenses. Finally, Gary marks up his products by 25% over the purchase price.
Gary provides you with the following information regarding projected sales for the next five months.

Required:
a. What is Gary's budgeted contribution margin income statement for October, November, and December?
b. What is Gary's cash budget for October, November, and December? Assume that Gary plans to begin October with $5,000 in cash on hand.
c. Why is Gary is facing a cash flow problem even though his business is profitable? Identify two things that Gary could do to alleviate the anticipated cash crunch.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes... Cash Budget
A cash budget is an estimation of the cash flows for a business over a specific period of time. These cash inflows and outflows include revenues collected, expenses paid, and loans receipts and payment. Its primary purpose is to provide the...