Hammocks and Swings, Ltd. has projected sales in units for four months of operations as follows:

April....................20,000

May....................25,000

June...................35,000

July.....................40,000

August................30,000

The hammocks sell for $35 each. Fifty-five percent of the customers are expected to pay in the month of sale and take a 3% discount; 30% are expected to pay in the month following the sale; 13% are expected to pay two months following the sale. The remaining 2% will never pay. February sales totaled $70,000 and March sales totaled $350,000.

It takes 3 metres of material to produce a hammock. The material cost is $5 per metre. In April, 10,000 metres of material are in beginning inventory; managers want to end each month with enough materials for 5% of the next month’s production. The firm pays for 75% of its material purchases in the month of purchase and 25% in the following month. Materials paid for within the month of purchase are eligible for a 2% discount.

It takes hours of 0.75 hours of labour to produce each hammock. Labour is paid $18 per hour and is paid in the same month as worked. Overhead is estimated to be $1.50 per unit plus $15,000 per month (including depreciation of $6,500). Overhead costs are paid as they are incurred.

Hammocks and Swings will begin April with 2,000 hammocks in finished goods inventory and no work-in-process inventory. The managers want to end each month with 10% of the following month’s sales in finished goods inventory. They will end each month with no work in process

Selling and administrative expenses are estimated to be $0.50 per hammock sold plus $20,000 per month (including depreciation of $7,500).

Required:

A. Prepare a cash budget listing cash receipts and disbursements for the second quarter of the year by month and in total. The firm will begin April with a cash balance of $65,000.

B. In March, the long range weather forecasts call for an early spring with unseasonably warm temperatures. As a result, the managers of Hammocks and Swings revised the sales forecast to the following:

April...................30,000

May....................40,000

June...................35,000

July.....................30,000

August................25,000

Prepare a new cash budget to help managers plan for this change.

C. As a result of the expected increase in sales, managers expect the following changes: Forty-five percent of customers will pay in the month of sale and take the 3% discount, 30% will pay in the month following the sale; 18% will pay in the second month following the sale; 5% will pay in the third month following the sale; and 2% will remain uncollectible. Adjust the cash budget to reflect this additional information.

D. What advice will you give to the managers of Hammocks and Swings?

E. In the past, Hammocks and Swings has negotiated a line of credit with their bank. The terms of this agreement state an annual interest rate of 3%, borrowing must occur at the start of a month and repayment is accepted only at month-end; a minimum cash balance of $25,000 must be maintained to qualify for the line of credit. There are no restrictions on the amount that can be borrowed; however, there is a minimum repayment amount of 1% of the outstanding loan. Include this information in a cash budget for Hammock and Swings managers. What advice will you give?