Big Blue Jeans Inc.

The Big Blue Jeans (BBJ) Company is an online supplier of clothes throughout the nation and has developed an overseas market in recent years.The company started off as a denim supplier in upstate Michigan, doing business under the trade name of Cotton Cloth Emporium. In a bankruptcy settlement in 2002 the company received some completed inventory from a manufacturer for the debt owed to BBJ.Initially BBJ had supplied the manufacture with approximately 450 bolts of denim cloth.The manufacturer then use the cloth to cut and sew jeans. Unfortunately, during a downturn the sales cycle, the blue jean maker filed for bankruptcy (Chapter 7), the assets were distributed, and the BBJ Company ended up with 14,000 pairs of jeans, in assorted sizes.

BBJ set out to sell the jeans and recoup some of their losses. Max Parsons, the son of the owner, and a recent graduate from the University of Michigan, was given the task of selling the jeans. Max decided that he would try selling the items online rather than through a salesforce because the company was not set up to sell in the highly competitive wholesale/retail clothing market. Also Max took into consideration that the sales people who sold for BBJ were trained in selling the raw materials and not the finished product.

A recent boom in the economy and some new competition had led to a "cash crunch" in the company which forced the principles to borrow money from a large eastern bank.The shortage of cash was more a planning problem than a true business problem, as the company had plenty of cash in their investment and receivables accounts.In fact, BBJ had done fairly well with their investment accounts which had a return of 12%. This was higher than their cost of capital, at 8%.The bank had lent BBJ the funds, however, part of the restrictions that the bank placed on BBJ was that their current ratio had to be held in excess of 3.

After some initial set of problems, the website was finally completed, and BBJ was online.Much to the surprise of the senior management the online store turned out to be a huge success. Max was made the vice president of the online sales and has since fostered a 400% growth in BBJ, primarily through the online business.Today online sales of clothes, including the blue jeans, comprise 70% of their business.

Currently BDJ has approximately 250 employees in 12 states and had sales last year of approximately $4.8 million.

Cash is King

One of the problems that has plagued BBG is being able to estimate how much money the company should hold in cash and how much it should place in its investment accounts.Naomi Sherman, the chief financial officer, has developed a strategy which is so far proven successful in estimating the amount of funds they should hold in total in their cash and investment account.You have been hired to help BBJ with some of the cash problems that they've been having.

It is been estimated, through Naomi Sherman's strategy that BBJ would have a total quarterly cash needs (per quarter) of approximately 40% of the previous year's quarterly sales for the same period.(For example, the cash needs this quarter is approximately 40% of the sales amount from the same quarter last year.) The following current year's data has been provided to you by the company.

Table 1

Balance

Sheet2010

Cash

$1881000

Accounts Payable

$180000

Accounts Receivable

1289000

Notes Payable @8%

1793000

Inventory

2455000

Accruals

856000

Total Current Assets

5625000

Current Liabilities

2829000

Long Term Debt @10%

3492000

Net Fixed Assets

2612000

Total Liabilities

6321000

Common Stock

1000000

Retained Earnings

916000

.

Total Equity

1916000

Total Assets

$8237000

Total Liab & Equity

$8237000

Table 2

Quarterly Income Statement For Calendar Year 2010

(to the nearest dollar)

First

Second

Third

Fourth

Annual

Quarter

Quarter

Quarter

Quarter

Total

Sales

$1,134,000

$1,190,700

$1,250,235

$1,312,747

$4,887,682

Cost of Goods Sold

589,680

619,164

650,122

682,628

2,541,595

Gross Margin

544,320

571,536

600,113

630,119

2,346,087

Depreciation

134,000

134,000

134,000

134,000

536,000

Administrative Expenses

219,000

227,760

236,870

246,345

929,976

EBIT

191,320

209,776

229,242

249,773

880,112

Interest

46,240

46,500

45,300

44,900

182,940

Taxable Income

145,080

163,276

183,942

204,873

697,172

Taxes (37%)

53,680

60,412

68,059

75,803

257,954

Net Income After Tax

$91,400

$102,864

$115,884

$129,070

$439,218

Naomi Sherman found that in order to obtain the needed bank services that BBG required, the company had to maintain an average balance of $40,000 in their checking account. As per BBJ's agreement with the bank, if the checking balance falls below $40,000 they are liable for substantial cost and penalties. Naomi stated that ever since she developed a strategy for estimating the amount of funds they should hold in their cash accounts, at no time has BBG's balance slip below the required amount.Naomi Sherman, however, avoided answering questions about what the optimal cash balance should be and when pressed she stated that the company was bound by the bank's minimum cash balance requirements.

The broker's statements stated that a transfer of funds cost $230.00 per transaction if the investment account was below $40,000.If the balance in the account was above $40,000 then the charge per transfer will be dropped to $150 regardless of the transfer amount.The variance (²) in the cash account has been estimated at 20% of the previous year's quarterly sales for the same period.

Big Blue Jeans Inc.

Show all Work!!!

1). Using the Baumol Model of cash management please calculate the amount of cash that should be transferred, for the first and second quarters of the upcoming year.Note: When doing quarterly projections you must use the quarterly sales figures from this year's (2010) income statement.Assume that the investment account will have a balance in excess of $35,000, although the exact amount is unknown at this time.(ie work out both cost scenarios).

b) Diagram the model.

2)a) Using the Miller - Orr model calculate the Z*, the ideal amount; (z) and the Upper Limit (h) for the company (to the next highest $1000's) for the first and second quarters of the upcoming year. Note: When doing quarterly projections use the quarterly income from this year's (2010) income statement.The company wants to keep the lower level (l) at $35,000.Assume that the investment account will have a balance in excess of $35,000, although the exact amount is unknown at this time.(ie work out both cost scenarios).

b) Diagram the model.