Each autumn, as a hobby, Anne Magnuson weaves cotton place mats to sell through a local craft shop. The mats sell for $ 20 per set of four. The shop charges a 10% commission and remits the net proceeds to Magnuson at the end of December. Magnuson has woven and sold 25 sets each for the past two years. She has enough cotton in inventory to make another 25 sets. She paid $ 7 per set for the cotton. Magnuson uses a four- harness loom that she purchased for cash exactly two years ago. It is depreciated at the rate of $ 10 per month. The Accounts Payable bal-ance relates to the cotton inventory and is payable by September 30.
Magnuson is considering buying an eight- harness loom so that she can weave more intricate patterns in linen. The new loom costs $ 1,000 and would be depreciated at $ 20 per month. Her bank has agreed to lend her $ 1,000 at 18% interest per year, with $ 200 payment of principal, plus accrued interest payable each December 31. Magnuson believes she can weave 15 linen place mat sets in time for the Christmas rush if she does not weave any cotton mats. She predicts that each linen set will sell for $ 50. Linen costs $ 18 per set. Magnuson’s supplier will sell her linen on credit, payable December 31.
Magnuson plans to keep her old loom whether or not she buys the new loom. The balance sheet for her weaving business at August 31, 2014, is as follows:

1. Prepare a cash budget for the four months ending December 31, 2014, for two alternatives: weaving the place mats in cotton using the existing loom and weaving the place mats in linen using the new loom. For each alternative, prepare a budgeted income statement for the four months ending December 31, 2014, and a budgeted balance sheet at December 31, 2014.
2. On the basis of financial considerations only, what should Magnuson do? Give your reason.
3. What nonfinancial factors might Magnuson consider in herdecision?

  • CreatedJanuary 16, 2015
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