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Question 5-Cash Budget (30 marks) Mountain Sports has aquired an open line of credit up to a maximum of $350,000. It will be necessary to convince the bank manager of this new Canmore branch ability to repay its line of credit including any interest. Management has provided the following list of assumptions to help in the preparation of the cash budget (note: you will need to use the projected income statement provided in Question 4 to complete the cash budget): 1 51. Beginning cash balance invested by owners $ 56,000 8 Quarter 1 Quarter 2 Quarter 3 Quarter 4 2. Sales by quarter (as % of total projected sales) 28% 29% 22% 10 1 3. Type of collections from customers: 2 Cash Sales 40% 60% 3 Credit Sales (accounts receivable) 14 15 Cash sales are collected in the quarter of the sale, all credit sales are collected in the quarter after the sale. 16 7 4. Merchandise purchases Merchandise purchases (cost of goods sold) are all paid in the quarter following purchase. (Quarter 1 purchases are bought in Quarter 18 1 but paid for in quarter 2). 19 20 5. Operating expenses 21 All other operating expenses (all expenses except cost of goods 22 6. Required investment in equipment paid in cash in the first quarter 23 $ 138,000. 24 25 7. Quarterly income tax payments paid in cash $ 8,000 26 27 8. Minimum cash balance $ 21,000 28 29 9. Borrowing and Repayments: Any borrowing will take place on the first day of the quarter and any repayments are paid at the end of the quarter. All borrowing and payments are made in increments of $1,000. Interest on borrowing can be ignored. 30 31 Required: Prepare a cash budget for the first year of operation in Canmore by quarter and in total. Show clearly on your budget the quarter(s) in which borrowing will be needed and the quarter(s) in which repayments can be made, as requested by the company's 21% Required: Prepare a cash budget for the first year of operation in Canmore by quarter and in total. Show clearly on your budget the quarter(s) in which borrowing will be needed and the quarter(s) in which repayments can be made, as requested by the company's bank. Mountain Sports Cash Budget For the year ended December 31 3 14 Year 15 Quarter 2 1 3 Summary 6 Percent of Sales 4 22% 7 Estimated Sales 28% $147,000 21% $110,250 $115,500 18 9 CASH BALANCE, Beginning 56,000 o Collections from customers 1 Cash Sales 2 Credit Sales 3 CASH AVAILABLE 4 Less: Cash Payments 5 26 Sales Commissions 37 Advertising 18 Property Taxes 19 Rent 0 Salaries & Wages 51 Equipment Purchase 2 Income tax Installment 53 Total Disbursements 4 Cash Excess (Deficiency) 5 Financing (Note 1) 56 Borrow Repayment of Principal (show as 7 negative) 8 Net Financing 9 Cash Balance, Ending 30 1 Note 1: Financing Calculations 2 Cash excess (Deficiency) 3 Minimum cash balance - 4 Amount to borrow (repay) Borrowing (Repayments) Rounded to 5 increment of $1,000 Merchandise purchases (COGS) $ 29% $152,250 100% $525,000 Note from Instructor: Total sales amount taken from question 4. Remember to refer to question 4 as this cash budget is a continuation of the Canmore expansion introduced in Question 4. This will be important for the cash disbursements as well! Question 4-Performance Measurement (8 marks) The president feels very strongly that Mountain Sports should expand operations to a second location. She has even found a prime location in Canmore, Alberta, One of the great things about Canmore is its proximity to the mountains, and its only about 10 minutes away from this beautiful, vibrant and internationally known Banff tourist town. Research indicates that the Canmore market is well suited to both cross-country skis and bikes that competition is fairly limited. The investment in assets (cash, inventory, equipment) required for the new location is S 162,000 5 Minimum required return on investments 16% 5 Actual 2019 return on investment of the original location 20% 8 Management has provided the following income statement to the bank manager the expected net income in the Static Budget 9 Amount 10 Sales in Units 4,200 1 Sales 525,000 100% 12 Less: Variable Costs: 13 Cost of Goods Sold 225,000 43% 14 Sales Commissions 15 Total Variable Costs 78.750 15% 58% 303,750 221,250 42% 16 Contribution Margin 17 Less: Fixed Costs: 18 Advertising 21,000 19 Property Taxes 9,000 20 Rent 54,000 21 Salaries & Wages 113,000 22 Total Fixed Costs 197,000 23 Net Operating Income 24,250 24 25 Part A: (4 marks) Calculate the following performance measurements for the proposed Canmore expansion: 26 Margin (see Chapter 11 notes) 27 28 Turnover (use investment in assets in equation) 29 30 Return on investment 31 32 Residual Income 33 34 Part B: Analysis (4 marks) Explain in your own words using case data. Marks will not be awarded for textbook definitions). a. If management is evaluated based on ROI, will the project be accepted (expansion into Canmore)? Why or 35 why not