Kalama-Rama’s monthly sales are typically 20 percent for cash and 80 percent on credit. All cash sales are given a 2 percent discount. The company’s credit A/R collections are in the following pattern: 80 percent in the month of sale, 18 percent in the month after sale, and 2 percent uncollectible. Sales for December 2009 were $600,000, and projected total sales for the first four months of 2010 are January, $800,000; February, $700,000; March, $750,000; and April, $680,000. Kalama-Rama’s average gross profit on sales is 30 percent. Kalama-Rama buys inventory to meet the current month’s sales demand and to meet a desired inventory policy of 25 percent of the following month’s sales. All purchases are made on account, and the company pays for 60 percent of the goods purchased in the month of purchase and 40 percent in the month following the purchase. Kalama-Rama has a monthly salary expense of $133,000, pays monthly utility bills of $78,500, pays $50,000 per month in building rent, incurs monthly depreciation charges of $3,500, and desires a $7,000 minimum cash balance. If necessary, the company can borrow funds at 12 percent per year or invest funds at 6 percent per year. Borrowings are assumed to be made on the first day of the month and investments on the last day of the month. Interest owed or earned is only accounted for when funds are paid or withdrawn. Borrowing and investments are made in even $1,000 amounts.
Required:
Prepare a cash budget for Kalama-Rama for January and February 2010, assuming that the January 1, 2010, cash balance is $7,125.