Chapter 06: Working Capital and the Financing Decision
6-21
b. If long-term financing at 12 percent had been utilized throughout the six months, would
the total-dollar interest payments be larger or smaller? Compute the interest owed over
the six months and compare your answer to that in part a.
6-18. Solution:
Carmen’s Beauty Salon
a. Short-term financing
Month
Rate
On Monthly
Basis
Amount
Actual
Interest
January
8%
.67%
$8,000
$ 53.60
February
9%
.75%
$2,000
$ 15.00
March
12%
1.00%
$3,000
$ 30.00
April
12%
1.25%
$8,000
$100.00
May
12%
1.00%
$9,000
$ 90.00
June
12%
1.00%
$4,000
$ 40.00
$328.60
6-18. (Continued)
b. Long-term financing
Month
Rate
On Monthly
Basis
Amount
January
12%
1%
$8,000
February
12%
1%
$2,000
March
12%
1%
$3,000
April
15%
1%
$8,000
Chapter 06: Working Capital and the Financing Decision
May
12%
1%
$9,000
June
12%
1%
$4,000
Total dollar interest payments would be larger under the
long-term financing plan as described in part b.
19. Break-even point in interest rates (LO3) In Problem 18, what long-term interest rate
would represent a break-even point between using short-term financing as described in part
a and long-term financing? Hint: Divide the interest payments in 18a by the amount of total
funds provided for the six months and multiply by 12.
6-19. Solution:
Carmen’s Beauty Salon (Continued)
Divide the total interest payments in part (a) of $328.60 by the
total amount of funds extended $34,000 ($8,000 + 2,000 + 3,000
Chapter 06: Working Capital and the Financing Decision
6-23
6-20. Solution:
Eastern Auto Parts
Jan
Feb
Mar
Apr
Sales
$60,000
$50,000
$95,000
$40,000
20% Cash Sales
12,000
10,000
19,000
8,000
80% Prior month’s sales*
56,000
48,000
40,000
76,000
Total cash receipts
$68,000
$58,000
$59,000
$84,000
21. Level production and related financing effects (LO3) Bombs Away Video Games
Corporation has forecasted the following monthly sales:
January …………. $95,000 July…………. $ 40,000
February ……….. 88,000 August …….. 40,000
March …………… 20,000 September .. 50,000
April …………….. 20,000 October……. 80,000
May ……………… 15,000 November … 100,000
June ……………… 30,000 December … 118,000
Total annual sales = $696,000
Bombs Away Video Games sells the popular Strafe and Capture video game. Its sells
for $5 per unit and costs $2 per unit to produce. A level production policy is followed.
Each month’s production is equal to annual sales (in units) divided by 12.
Of each month’s sales, 30 percent are for cash and 70 percent are on account. All
accounts receivable are collected in the month after the sale is made.
a. Construct a monthly production and inventory schedule in units. Beginning inventory
in January is 20,000 units. (Note: To do part a, you should work in terms of units of
production and units of sales.)
b. Prepare a monthly schedule of cash receipts. Sales in the December before the planning
year are $100,000. Work part b using dollars.
c. Determine a cash payments schedule for January through December. The production
costs of $2 per unit are paid for in the month in which they occur. Other cash payments,
besides those for production costs, are $40,000 per month.
Chapter 06: Working Capital and the Financing Decision
6-24
d. Prepare a monthly cash budget for January through December using the cash receipts
schedule from part b and the cash payments schedule from part c. The beginning cash
balance is $5,000, which is also the minimum desired.
6-21. Solution:
Bombs Away Video Games Corporation
a. Production and inventory schedule in units
Beginning
Inventory
+
Production1
–
Sales2
=
Ending
Inventory
Jan.
20,000
+
11,600
–
19,000
=
12,600
Feb.
12,600
+
11,600
–
17,600
=
6,600
Mar.
6,600
+
11,600
–
4,000
=
14,200
Apr.
14,200
+
11,600
–
4,000
=
21,800
May
21,800
+
11,600
–
3,000
=
30,400
June
30,400
+
11,600
–
6,000
=
36,000
July
36,000
+
11,600
–
8,000
=
39,600
Aug.
39,600
+
11,600
–
8,000
=
43,200
Sept.
43,200
+
11,600
–
10,000
=
44,800
Oct.
44,800
+
11,600
–
16,000
=
40,400
Nov.
40,400
+
11,600
–
20,000
=
32,000
Dec.
32,000
+
11,600
–
23,600
=
20,000
1 Total annual sales = $696,000
$696,000/$5 per unit = 139,200 units
139,200 units/12 months = 11,600 per month
2 Monthly dollar sales/$5 price = unit sales
Chapter 06: Working Capital and the Financing Decision
6-25
6-21. (Continued)
b. Bombs Away Video Games Corporation
Cash Receipts Schedule
Jan.
Feb.
Mar.
Apr.
May
June
Sales (in dollars)
$95,000
$88,000
$20,000
$20,000
$15,000
$30,000
30% Cash sales
28,500
26,400
6,000
6,000
4,500
9,000
70% Prior month’s sales
70,000*
66,500
61,600
14,000
14,000
10,500
Total cash receipts
$98,500
$92,900
$67,600
$20,000
$18,500
$19,500
*based on December sales of $100,000
July
Aug.
Sept.
Oct.
Nov.
Dec.
Sales (in dollars)
$40,000
$40,000
$50,000
$80,000
$100,000
$118,000
30% Cash sales
12,000
12,000
15,000
24,000
30,000
35,400
70% Prior month’s sales
21,000
28,000
28,000
35,000
56,000
70,000
Total cash receipts
$33,000
$40,000
$43,000
$59,000
$ 86,000
$105,400
Chapter 06: Working Capital and the Financing Decision
6-26
6-21. (Continued)
c. Bombs Away Video Games Corporation
Cash Payments Schedule
Constant production
Jan.
Feb.
Mar.
Apr.
May
June
11,600 units × $2
$23,200
$23,200
$23,200
$23,200
$23,200
$23,200
Other cash payments
40,000
40,000
40,000
40,000
40,000
40,000
Total cash payments
$63,200
$63,200
$63,200
$63,200
$63,200
$63,200
July
Aug.
Sept.
Oct.
Nov.
Dec.
11,600 units × $2
$23,200
$23,200
$23,200
$23,200
$23,200
$23,200
Other cash payments
40,000
40,000
40,000
40,000
40,000
40,000
Total cash payments
$63,200
$63,200
$63,200
$63,200
$63,200
$63,200
Chapter 06: Working Capital and the Financing Decision
6-27
6-21. (Continued)
d. Bombs Away Video Games Corporation
Cash Budget
Jan.
Feb.
Mar.
Apr.
May
June
Net cash flow
$35,300
$29,700
$ 4,400
($43,200)
($44,700)
($43,700)
Beginning cash
5,000
40,300
70,000
74,400
31,200
5,000
Cumulative cash balance
40,300
70,000
74,400
31,200
(13,500)
(38,700)
Monthly loan or (repayment)
-0-
-0-
-0-
-0-
18,500
43,700
Cumulative loan
-0-
-0-
-0-
-0-
18,500
62,200
Ending cash balance
40,300
70,000
74,400
31,200
5,000
5,000
July
Aug.
Sept.
Oct.
Nov.
Dec.
Net cash flow
($30,200)
($23,200)
($20,200)
($4,200)
$22,800
$42,200
Beginning cash
5,000
5,000
5,000
5,000
5,000
5,000
Cumulative cash balance
(25,200)
(18,200)
(15,200)
800
27,800
47,200
Monthly loan or (repayment)
30,200
23,200
20,200
4,200
(22,800)
(42,200)
Cumulative loan
92,400
115,600
135,800
140,000
117,200
75,000
Ending cash balance
5,000
5,000
5,000
5,000
5,000
5,000