M corporation, a merchandising company, is preparing the budget for 2021 and would like your assistance in preparing its April 2021's cash budget. M corporation is projecting a cash balance of $30,000 in its march 31st, 2021 balance sheet.

It projects sales will be $150,000 for February, on $300,000 for March, $200,000 for April, and $250,000 for May. All sales are credit sales (on account). On average, 70% of customers pay their accounts in the month of sale; 26% pay in the following month; and the remaining 4% never pay.

The company's gross margin is 20% of sales. During each month, inventory purchased is equal to next month's projected cost of goods sold. Purchases are made on account, with the cash paid as follows: 35% before the end of the month and 65% in the following month.

Other information gathered for the second quarter for 2021 is as follows:

-equipment purchases in April for cash are expected to be $35,000

-selling and administrative costs are usually 12% of sales and paid in cash in the month incurred

- depreciation and amortization is $10,000 per month and

- cash dividends of $20,000 will be paid in April.

M corporation wants to maintain a minimum cash balance of $25,000 at the end of each month and has therefore arranged a line of credit (LOC) with the bank to cover off any financing needs. The interest rate is 12% per annum. Any monies takes out of the LOC are removed on the first day of the month. Any repayments to the LOC are made on the last day of the month. Interest on the LOC is calculated at the end of each month and is paid on the first day of the subsequent month. The interest payable account on march 31st 2021 has a balance of $150.

a) prepare a cash budget for april 2021. Specify whether financing is required from the LOC and if so, how much will be necessary.

b) determine the balance of the following three accounts at April 30th , 2021 :

1) accounts receivable, net of allowance for doubtful accounts

2) accounts payable

3) interest payable

c) ignore parts a and b

instead assume the M corporation has adopted a participative budget approach. For each month, managers submit a budgeted net income to the company's president for approval. The managers' performance evaluation is partly based on whether the company's actual performance meets or beats target performance measured by the budgeted net income. Assume that the managers are projecting a net income of $15,000 for april 2021.

What kind of dysfunctional incentive may be caused by this performance evaluation system?