Question

Game Depot is a retail store selling video games. Sales are uniform for most of the year but pick up in June and December both because new releases come out and because consumers purchase games in anticipation of summer or winter holidays. Game Depot also sells and repairs game systems. The forecast of sales and service revenue for the March–June 2014 is as follows:


Almost all the service revenue is paid for by bank credit card, so Game Depot budgets this as 100% bank card revenue. The bank cards charge an average fee of 3% of the total. Half of the sales revenue is also paid for by bank credit card, for which the fee is also 3% on average. About 10% of the sales are paid in cash, and the rest (the remaining 40%) are carried on a store account. Although the store tries to give store credit only to the best customers, it still averages about 2% for uncollectible accounts; 90% of store ­accounts are paid in the month following the purchase, and 8% are paid 2 months after purchase.

Required
1. Calculate the cash that Game Depot expects to collect in May and in June 2014. Show calculations for each month.
2. Game Depot has budgeted expenditures for May of $ 8,700 for the purchase of games and game systems, $ 2,800 for rent and utilities and other costs, and $ 2,000 in wages for the two part-time employees.
a. Given your answer to requirement 1, will Game Depot be able to cover its payments for May?
b. The projections for May are a budget. Assume ( independently for each situation) that May revenues might also be 5% less and 10% less and that costs might be 8% higher. Under each of those three scenarios, show the total net cash for May and the amount Game Depot would have to borrow if cash receipts are less than cash payments. Assume the beginning cash balance for May is $ 200.
3. Why do Game Depot’s managers prepare a cash budget in addition to the revenue, expenses, and operating income budget? Has preparing the cash budget been helpful? Explain briefly.
4. Suppose the costs for May are as described in requirement 2, but the expected cash receipts for May are $ 12,400 and beginning cash balance is $ 200. Game Depot has the opportunity to purchase the games and game systems on account in May, but the supplier offers the company credit terms of 2/ 10 net 30, which means if Game Depot pays within 10 days (in May) it will get a 2% discount on the price of the merchandise. Game Depot can borrow money at a rate of 24%. Should Game Depot take the purchasediscount?


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  • CreatedMay 14, 2014
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