PROBLEM DATA On January 1, Sweet Pleasures, Inc., begins business. The company has $14,000 cash on hand and is attempting to project cash receipts and disbursements through April 30. On May 1, a note payable of $10,000 will be due. This amount was borrowed on January 1 to carry the company through its first four months of operation. The unit purchase cost of the company's single product, a box of Sweet Pleasures chocolates, is $12. The unit sales price is $28. Projected purchases and sales in units for the first four months are: Purchases Sales 2,400 1,200 January February March 2,600 2,500 2,400 2,500 2,700 April 3,100 Sales terms call for a 5% discount if paid within the same month that the sale occurred. It is expected that 50% of the billings will be collected within the discount period, 25% by the end of the month after purchase, 19% in the following month, and 6% will be uncollectible. Approximately 60% of the purchases are paid for in the month purchased. The rest are due and payable in the next month. Total fixed marketing and administrative expenses for each month include cash expenses of $5,000 and depreciation on equipment of $2,000. Variable marketing and administrative expenses total $6 per unit sold. All marketing and administrative expenses are paid as incurred. REQUIREMENT 1. You have been asked to prepare a cash budget for the next four months to see if the loan can be repaid. Review the worksheet CASHBUD that follows these requirements. The problem data have already been entered in the Data Section of the worksheet. 2. Open the file CASHBUD from the website for this book at cengagebrain.com. Enter the eight formulas where indicated on the worksheet. Enter your name in cell A1. Save the file as CASHBUD2. Print the worksheet when done. Also print your formulas. Check figure: Ending cash balance for April (cell E54), $7,772. 3. Can the $10,000 note be repaid on May 1? Explain. 4. How do the other months look? Do you anticipate any problems? Explain. WHAT-IF ANALYSIS 5. The following four suggestions have been made to improve the company's cash position. Evaluate the effect on cash flow for each of the four suggestions. After evaluating each suggestion, enter the projected cash balances in the spaces provided. Consider each suggestion separately. Reset cells to their initial values after each new suggestion. a. Seek agreement with suppliers to extend the credit period to 30 days. This would mean that all current monthly purchases would be paid for in the following month. b. Raise the unit price from $28 to $30. A price increase will reduce unit sales by 10% each month. Unit purchases will also be reduced by 10%. c. Put the company's two salespeople on straight commission. This would reduce fixed marketing and administrative costs to $1,500 per month and raise variable marketing and administrative costs to $7 per unit. d. Increase the cash discount from 5% 10%. It is anticipated that this would increase the percentage of customers paying within the discount period to 85%, and those paying the month after the discount period would drop to 8%. Five percent would pay in the following month and 2% would still be uncollectible. CASHBUD Cash Budgeting Data Section $14,000 $28.00 1,200 2,400 2,500 2,700 Beginning cash balance, January 1 Sales: Unit sales price January estimated units February estimated units March estimated units April estimated units Collections: Cash discount (%) % Collected current month % Collected next month % Collected following month % Uncollectible Purchases: Unit purchase cost January planned purchases (units) February planned purchases (units) March planned purchases (units) April planned purchases (units) % Paid in month purchased % Paid in month after purchase Marketing & administrative: Fixed cash expenses per month Depreciation per month Variable cost per unit sold 5% 50% 25% 19% 6% $12 2,400 2,600 2,500 3,100 60% 40% $5,000 $2,000 $6 Answer Section Sweet Pleasures Inc. Cash Budget January FORMULA1 February $0 March $0 April $0 FORMULA2 FORMULA FORMULA4 0 0 0 0 0 0 $0 $0 $0 $0 Cash balance, beginning Add receipts: Collections January sales Collections February sales Collections March sales Collections April sales Total available Less disbursements: Purchases made in January Purchases made in February Purchases made in March Purchases made in April Fixed marketing & admin. Variable marketing & admin. Total disbursements Cash balance, ending FORMULA FORMULA6 0 $0 0 FORMULAZ FORMULAS $0 $0 0 0 $0 $0 0 0 $0 $0 $0 0 0 0 $0 $0