Question: A college student Brad Worth plans to sell atomic alarm

A college student, Brad Worth, plans to sell atomic alarm clocks with MP3 players over the Internet and by mail order to help pay his expenses during the fall semester. He buys the clocks for $32 and sells them for $50. If payment by check accompanies the mail orders (estimated to be 40% of sales), he gives a 10% discount. If customers include a credit card number for either Internet or mail order sales (30% of sales), customers receive a 5% discount. The remaining collections are estimated to be:
One month following ........ 15%
Two months following ...... 6%
Three months following ....... 4%
Uncollectible ........... 5%
Sales forecasts are as follows:
September ...... 120 units
October ....... 220 units
November ...... 320 units
December ..... 400 units
January ...... Out of business
Brad plans to pay his supplier 50% in the month of purchase and 50% in the month following. A 6% discount is granted on payments made in the month of purchase; however, he will not be able to take any discounts on September purchases because of cash flow constraints.
All September purchases will be paid for in October. He has 50 clocks on hand (purchased in August and to be paid for in September) and plans to maintain enough end-of-month inventories to meet 70% of the next month’s sales.

A. Prepare schedules for monthly budgeted cash receipts and cash disbursements for this venture.
B. During which months will Brad need to finance purchases?
C. Brad planned simply to write off the un-collectibles. However, his accounting professor suggested he turn them over to a collection agency. How much could Brad let the collection agency keep so that he would be no worse off?

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  • CreatedJanuary 26, 2015
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