The Big Sister Company is in a seasonal business and prepares quarterly budgets. Its fiscal year runs
Question:
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The Big Sister Company is in a seasonal business and prepares quarterly budgets. Its fiscal year runs from January 1 through December 31. Production occurs only in the first quarter (January to March), but sales take place throughout the year. The sales forecast for the coming year shows the following:
First quarter
$477,000Third quarter
$477,000Second quarter
291,000Fourth quarter
477,000
There are no cash sales, and the beginning balance of receivables is expected to be collected in the first quarter. Subsequent collections are two-thirds in the quarter when sales take place and one-third in the following quarter.
The company makes materials purchases valued at $402,000in the first quarter, but makes no purchases in the last three quarters. It makes payment when it purchases the materials.
Direct labour of $347,000is incurred and paid only in the first quarter. Factory overhead of $332,000is also incurred and paid in the first quarter, and is at a standby level of $100,000during the other three quarters. Selling and administrative expenses of $34,000are paid each quarter throughout the year. Big Sister has an operating line of credit with its bank at an interest rate of 5% per annum. The company plans to keep a cash balance of at least $10,000at all times, and it will borrow and repay in multiples of $5,000. It makes all borrowings at the beginning of a quarter, and makes all payments at the end of a quarter. It pays interest only on the portion of the loan that it repays in a quarter.
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