The following table lists the data from the budget of Lewellen Products. 35% of the company's sales will be collected in the month of the sale; the other 65% will be collected in the following month. The company pays all its credit purchases with a one-month delay. Credit purchases in June were $206,300, and total sales in June were $419,000.
We make these assumptions to simplify the analysis:
- Lewellen Products has an open line of credit with its bank, which can be used as needed to bolster the cash position.
- The company desires to maintain a $70,000 minimum cash balance at the end of each month. Therefore, borrowing must be sufficient to cover the cash shortfall and to provide for the minimum cash balance of $70,000. The beginning cash balance for July is $100,000.
- All borrowings and repayments must be in multiples of $1,000 amounts, and interest is 3 percent per annum.
- Interest is computed and paid on the principal during the borrowing period.
- All borrowings take place at the beginning of a month, and all repayments are made at the end of a month. The company will take a loan at the beginning of July, repay some portion of the loan at the end of August, and should be able to pay off the remaining balance of the loan at the end of September. You have to figure out the amount of loan taken at the beginning of July.
- The company pays the selling and administrative expenses, income taxes, dividends, and pays for equipment purchase at the end of a month.
Lewellen Products
Sales, purchase, and other budgets June July August September
Total sales
$419,000
$485,000
$510,000
$565,000
Purchases of material
For cash
$135,000
$103,000
$95,000
For credit
$206,300
$210,800
$278,300
$296,700
Selling and admin. expenses
$42,700
$56,500
$63,800
Income taxes
$20,000
$20,000
$20,000
Dividends
$15,000
$15,000
$15,000
Equipment purchase
$108,000
$83,800
$0
