Question
1) Projected sales for November 2019 are $230,000. Credit sales are typically 85% of total sales. Helping Hands credit experience indicates that 12% of credit
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1) Projected sales for November 2019 are $230,000. Credit sales are typically 85% of total sales. Helping Hands credit experience indicates that 12% of credit sales are collected during the month of sale, 74% in the month following the sale, and 14% in the second month following the sale. Experience shows the remaining credit sales are uncollectible.
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2) Helping Hands cost of goods sold generally runs at 60% of sales. Inventory is purchased on account and 12% of each months purchases are paid during the month of purchase. The remainder is paid during the following month. In order to have adequate stocks of inventory on hand, the company attempts to have inventory on hand at the end of each month equal to 25% of the next months projected cost of goods sold.
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3) The controller has estimated that Helping Hands other monthly expenses will be as follows:
Sales salaries $30,000 Advertising and promotion $6,000
Administrative salaries $11,000
Depreciation $8,000 Interest on bonds $1,250
Property taxes $4,000
In addition, sales commissions run at the rate of 3.0 percent of sales. Sales commissions are paid in the month following the month of sale.
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4) The company president has indicated that the company should invest $200,000 in an automated inventory-handling system to control the movement of inventory in the companys warehouse just after the new year begins. The president would like to purchase the equipment primarily from the companys cash and marketable securities. However, the president believes the company should have a minimum cash balance of $20,000 at the end of each month. If necessary, the remainder of the equipment purchase may be financed using short-term credit from a local bank. The minimum lending period for such a loan is three months (this means the earliest the loan can be paid off is March 31st). The current short-term interest rates are 6 percent per year and are expected to remain at this rate through the time the equipment is purchased. If a loan is necessary, the entire amount required for the quarter must be borrowed on January 1st and must be in a $1,000 increment. The loan is a short term loan and the president has decided it should be paid off at the end of the first quarter if possible. If the entire amount cannot be repaid at March 31st, any partial payment will be paid at the end of the first quarter and in a $1,000 increment.
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