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Case Study Alpine Wear, Inc.

Ann, Austin, the recently hired treasurer of Alpine Wear, Inc., was summoned to the office of Billy Joe Durango, the

president and chief executive officer. When she got to Billys office, Ann found him shuffling through a set of worksheets. He told her

that because of a recent tightening of credit by the Federal Reserve; hence an impending contraction of bank loans, the firms bank has

asked each of its major loan customers for an estimate of their borrowing requirements for the remainder of 1993 and the first half of

1994.

Billy had a previously scheduled meeting with the firms bankers the following Monday, so he asked Ann to come up with an

estimate of the firms probable financing requirements for him to submit at that time, Billy was going away on a white-water rafting

expedition, a trip that had already been delayed several times, and he would not be back until just before his meeting with the bankers.

Therefore, Billy asked Ann to prepare a cash budget while he was away.

Due to the firms rapid growth over the last few years, no one had taken the time to prepare cash budged recently; thus Ann

was afraid she would have to start from scratch. From information already available, Ann knew that no loans would be needed from

the bank before January, so she decided to restrict her budget to the period from January through June 1994. As a first step, she

obtained the following sales forecast from the marketing department:

1993 November $300,000

December 480,000

1994 January 600,000

February 720,000

March 840,000

April 980,000

May 780,000

June 600,000

July 300,000

August 240,000

(Note that the sales figures are before any discounts; that in, they are not net of discounts)

Alpine Wears credit policy is 1.5/10, net 30. Hence, a 1.5 percent discount is allowed if payment is made within 10 days of

the sale; otherwise, payment in full is due 30 days after the date of sale. On the basis of a previous study, Ann estimates that,

generally, 25 percent of the firms customers take the discount, 65 percent pay within 30 days, and 10 percent pay late, with the late

payments averaging about 60 days after the invoice date. For monthly budgeting purposes, discount sales are assumed to be collected

in the month of the sale, net sales in the month after the sale, and late sales two months after the sale.

Alpine Wear begins production of goods two months before the anticipated sale date. Variable production costs are made up

entirely of purchased materials and labor, which total 60 percent of forecasted sales-20 percent for materials and 40 percent for labor.

All materials are purchased just before production begins, or two months before the sales f the finished goods. On average, Alpine

Wear pays 50 percent of the materials cost in the month when it receives the materials, and the remaining 50 percent the next month,

or one month prior to the sale. Labor expenses follow a similar pattern, but only 30 percent is paid two months prior to the sale, while

70 percent is paid one month before the sale.

Alpine Wear pays fixed general and administrative expenses of approximately $90,000 a month, while lease obligations

amount $36,000 per month. Both expenditures are expected to continue at the same level throughout the forecast period. The firm

estimates miscellaneous expenses to be $30,000 monthly and fixed assets are currently being depreciated by $48,000 per month.

Alpine Wear has $1,200,000 (book value) of bonds outstanding. They carry a 10 percent semiannual coupon, and interest is paid on

January 15 and July 15. Also, the company is planning to replace an old machine in June with a new one costing $400,000. The old

machine has both a zero book and a zero market value. Federal and state income taxes are expected to be $90,000 quarterly, and

payments must be made on the 15th December, March, June, and September. Alpine Wear has a policy of maintaining a minimum

cash balance of $300,000 and this amount will be on hand on January 1, 1994.

Assume that you were recently hired as Ann Austins assistant, and she has turned the job of preparing the cash budget over

to you. You must meet with her and Billy Durango on Sunday night to review the budget prior to Billys meeting with the bankers on

Monday. Answer the following question, which she provided to you for direction, but also think about any other related issues that

Ann or Billy, or the bankers, might rise concerning the projections. In particular, be prepared to explain the sources of all the number

and the effects on the companys funds requirements of any of the basic assumptions turn out to be incorrect. Your predecessor was

fired for not really understanding a report he submitted, and you dont want to suffer the same fate!

Questions:

1. Construct a monthly cash budget for Alpine Wear for the period January through June 1994. For the purposes of this question,

disregard both interest payments on short-term bank loans and interest received from investing surplus funds. Also, assume that al

cash flows occur on the 15th of each month. Finally, note that collections from sales in November and December of 1993 will not

be completed until January and February of 1994, respectively. If you have access to Excel model,

use it to generate the required numbers. What is the maximum cumulative funds shortfall during the 6-month planning period?

2. Assume that the bank will agree to give Alpine Wear a $400,000 line of credit. Will this be sufficient to cover any expected cash

shortfalls? Suppose the bank refused to grant the loan, and thus the company had to obtain short-term financing from other

sources. What other sources might be available?

3. The monthly cash budget you have prepared assumes that cash flows occur on the 15th of each month. Suppose Alpine Wears

outflows tend to cluster at the beginning of the month, while collections tend to be heaviest toward the end of each month. How

would this affect the validity of the monthly budget? What could be done to correct any inaccuracies that might result from the

mismatch of inflows and outflows?

4. Now assume that you and Ann decide you need to develop daily cash budget for the month of January, based on the following

assumptions.

(1) Assume that Alpine Wear normally operates 7 days a week; therefore, use 31 days for your January cash budged.

(2) Sales are made at a constant rate throughout the month; that is, 1/31st of the January sales are made each day.

(3) Daily sales follow the 25 percent, 65 percent, and 10 percent collection breakdown.

(4) Discount purchasers take full advantage of the 10-day discount period before paying, and on time purchasers wait the full

30 days to pay. Thus, collections during the first 10 days of January will reflect discount sales from the last 10 days of

December, plus regular sales made in earlier months. Also, on January 31st, Alpine Wear will begin collecting Januarys

net sales and Decembers late sales.

(5) The lease payment in the made on the first of the month.

(6) Fifty percent of both labor costs and general and administrative expenses are paid on the 1st and 50 percent are paid on the

15th

.

(7) Materials are delivered on the 1st and paid for on the 5th

.

(8) Miscellaneous expenses are incurred and paid evenly throughout the month: 1/31st each day.

(9) Required interest payments are made on the 15th

.

(10)The target cash balance is $300,000 and this amount must be in the bank on each day. This minimum balance is required by

the firms bank.

If you calculated it correctly, the monthly cash budget should have indicated that a bank loan of $184,650 would be required in January. Does the daily cash budget support this conclusion?