Comprehensive Problem

Part 1.

Rancho, Inc. forecasts the following sales for the second quarter of 2015, as well as actual March sales:

March (actual)		April	May	June	2nd Q. Total
$3,000		$4,000	$5,000	$6,000	$15,000

In addition:

The company makes 60% cash sales and 40% credit sales.

It collects all credit sales in the month after the sale.

The firm budgets $4,400 for monthly operating expenses. That amount includes $400 for depreciation.

The firm pays all of its cash-based expenses in the month incurred.

Rancho, Inc. had $100 of cash at March 31, 2015, and it must maintain a minimum $500 cash balance at the end of every month to ensure liquidity.

The company has a line of credit with its bank that allows borrowing in $100 increments at 12% interest. All borrowing takes place at the beginning of the month in which the company requires cash.

The company must repay principal in hundred dollar increments.

The credit facility requires Rancho, Inc. to repay all accrued interest to date whenever it repays principal.

Principal repayments and interest payments occur at the end of a month (funds permitting).

Required:

Part 1.

Develop monthly and quarterly short-term financing budgets for the second quarter of 2015 using the templates provided below.

Cash Flow Worksheet

	April	May	June	2nd Q
Cash sales
Credit sales collected
Cash receipts
Cash monthly payments
Cash inflow (outflow)

Short-Term Financing Budget

	April	May	June	2nd Q
Beginning cash balance
Net cash flow
Available cash
Borrowing needed
Repayment of principal
Payment of interest
Net cash balance

Part 2.

Use the sales forecasts from Part 1 above. Assume Rancho sells its only product for $10. The firm has monthly fixed costs of $600 and variable costs of $8 per unit.

Compute the monthly breakeven point in units and dollars.

Forecast monthly and quarterly operating incomes.

Assume Rancho could lower its variable costs to $7 per unit if it were willing to increase its fixed costs by $550 (to $1,150 per month). Based on its sales forecasts, should Rancho adopt the new cost structure?

Part a. Breakeven point in sales units:

Breakeven point in dollars:

Part b.

		April	May	June	2nd Q. Total
Sales revenue
Variable costs
Contribution margin
Fixed costs
Operating income

Part c.

		April	May	June	2nd Q. Total
Sales revenue
Variable costs
Contribution margin
Fixed costs
Operating income