6. Cash budget Mellon Company's financial managers are meeting with the company's bank to renew their line of credit and discuss their investment needs. They have prepared the company's operating cash budget for the last six months of the year. The following budget assumptions were used to construct the budget: Mellon's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. Mellon's sales are made on credit with terms of 2/10, net 30. Mellon's experience is that 25% is collected from customers who take advantage of the discount, 65% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts. The cost of materials averages 45% of Mellon's finished product. The purchases are generally made one month in advance of the sale, and Mellon pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,100 million, then purchases during June would be $495 ($1,100 million x 0.45), and this amount would be paid in July. Other cash expenses include wages and salaries at 19% of sales, monthly rent of $40 million, and other expenses at 5% of sales. Estimated tax payments of $59 million and $61 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,000 milli payment a new plant must be made in September. Assume that Mellon's targeted cash balance is $251, and the estimated cash on hand on July 1 is $251. Use the preceding information to fill in the missing amounts in the following cash budget. Mellon Company Cash Budget For the Six Months Ended December 31, Year 1 ($ millions) May June July August September October November December Credit sales $950 $980 $1,000 $1,010 $1,030 $1,050 $1,080 $1,100 Credit purchases 450 464 473 486 495 July August September October November December Cash receipts Collections from this month's sales 247 252 257 265 270 650 657 670 683 702 98 100 101 103 105 Collections from previous month's sales Collections from sales two months previously Total cash receipts Cash disbursements Payments for credit purchases $995 $1,009 $1,028 $1,051 $1,077 450 455 464 486 495 Wages and salaries 190 192 196 205 209 Rent 40 40 40 40 40 Other expenses 50 51 52 54 55 Taxes 59 Payment for plant construction 1,000 Total cash disbursements $789 $738 $1,752 $785 $799 Net cash flow $188 $257 - $743 $201 $266 $278 251 439 696 -47 154 420 (Receipts - disbursements) Beginning cash balance Ending cash balance Target (minimum) cash balance Surplus (shortfall) cash $439 $696 $154 $420 $698 251 251 251 251 251 $188 $445 -$97 $169 $447 Mellon Company will be able to invest in short-term marketable securities in some months and will need to borrow to cover cash requirements in others. In the last six months of the year, Mellon will $ to end the year with a cash of $ and a cash of $ . Mellon Company will want a credit line of at least $ to cover the month with the greatest shortfall, and the financial managers can tell the bank to expect that they will be able to invest up to $ in short-term marketable securities. 6. Cash budget Mellon Company's financial managers are meeting with the company's bank to renew their line of credit and discuss their investment needs. They have prepared the company's operating cash budget for the last six months of the year. The following budget assumptions were used to construct the budget: Mellon's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. Mellon's sales are made on credit with terms of 2/10, net 30. Mellon's experience is that 25% is collected from customers who take advantage of the discount, 65% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts. The cost of materials averages 45% of Mellon's finished product. The purchases are generally made one month in advance of the sale, and Mellon pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,100 million, then purchases during June would be $495 ($1,100 million x 0.45), and this amount would be paid in July. Other cash expenses include wages and salaries at 19% of sales, monthly rent of $40 million, and other expenses at 5% of sales. Estimated tax payments of $59 million and $61 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,000 milli payment a new plant must be made in September. Assume that Mellon's targeted cash balance is $251, and the estimated cash on hand on July 1 is $251. Use the preceding information to fill in the missing amounts in the following cash budget. Mellon Company Cash Budget For the Six Months Ended December 31, Year 1 ($ millions) May June July August September October November December Credit sales $950 $980 $1,000 $1,010 $1,030 $1,050 $1,080 $1,100 Credit purchases 450 464 473 486 495 July August September October November December Cash receipts Collections from this month's sales 247 252 257 265 270 650 657 670 683 702 98 100 101 103 105 Collections from previous month's sales Collections from sales two months previously Total cash receipts Cash disbursements Payments for credit purchases $995 $1,009 $1,028 $1,051 $1,077 450 455 464 486 495 Wages and salaries 190 192 196 205 209 Rent 40 40 40 40 40 Other expenses 50 51 52 54 55 Taxes 59 Payment for plant construction 1,000 Total cash disbursements $789 $738 $1,752 $785 $799 Net cash flow $188 $257 - $743 $201 $266 $278 251 439 696 -47 154 420 (Receipts - disbursements) Beginning cash balance Ending cash balance Target (minimum) cash balance Surplus (shortfall) cash $439 $696 $154 $420 $698 251 251 251 251 251 $188 $445 -$97 $169 $447 Mellon Company will be able to invest in short-term marketable securities in some months and will need to borrow to cover cash requirements in others. In the last six months of the year, Mellon will $ to end the year with a cash of $ and a cash of $ . Mellon Company will want a credit line of at least $ to cover the month with the greatest shortfall, and the financial managers can tell the bank to expect that they will be able to invest up to $ in short-term marketable securities