$ The investment in assets (cash, inventory, equipment) required for the new location is Minimum required return on investments Actual 2019 return on investment of the original location 165,000 16% 18% Management has provided the following income statement to the bank manager the expected net income in Static Budget % Amount Sales in Units 4,008 Sales 501,000 100% Less: Variable Costs: Cost of Goods Sold 223,000 45% Sales Commissions 75,150 15% Total Variable Costs 298,150 60% Contribution Margin 202,850 40% Less: Fixed Costs: Advertising 22,000 Property Taxes 9,000 Rent 48,000 Salaries & Wages 106,000 Total Fixed Costs 185,000 Net Operating Income 17,850 Question 5 - Cash Budget (50 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. 1 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. Beginning cash balance invested by owners $ 54,000 Quarter 1 Quarter 2 Quarter 3 Quarter 4 2. Sales by quarter (as % of total projected sales) 25% 22% 29% 24%! 42% 58% 3. Type of collections from customers: Cash Sales Credit Sales (accounts receivable) Cash sales are collected in the quarter of the sale, all credit sales are collected in the quarter after the sale. 4. Merchandise purchases Merchandise purchases (cost of goods sold) are all paid in the quarter following purchase. (Quarter 1 purchases are bought in Quarter 1 but paid for in quarter 2). 5. Operating expenses All other operating expenses (all expenses except cost of goods sold) are paid on a monthly basis. 6. Required investment in equipment paid in cash in the first quarter 138,000 $ 7. Quarterly income tax payments paid in cash $ 8,000 8. Minimum cash balance $ 28,000 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. 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 4 Quarter 2 22% $110,220 1 25% $125,250 Percent of Sales Estimated Sales 3 29% $145,290 Year Summary 100% $501,000 24% $120,240 CASH BALANCE, Beginning $ 54,000 Collections from customers: Cash Sales Credit Sales CASH AVAILABLE Less: Cash Payments Merchandise purchases (COGS) Sales Commissions Advertising Property Taxes Rent Salaries & Wages Equipment Purchase Income tax Installment Total Disbursements Cash Excess (Deficiency) Financing (Note 1) Borrow Repayment of Principal (show as negative) Net Financing Cash Balance, Ending
