Problem 535

(Part Level Submission)

GrowMaster Products, a rapidly growing distributor of home gardening equipment, is formulating its plans for the coming year. Carol Jones, the

firm’s marketing director, has completed the following sales forecast.

Month Sales Month Sales

January $900,000 July $1,500,000

February $1,000,000 August $1,500,000

March $900,000 September $1,600,000

April $1,150,000 October $1,600,000

May $1,250,000 November $1,500,000

June $1,400,000 December $1,700,000

Phillip Smith, an accountant in the Planning and Budgeting Department, is responsible for preparing the cash flow projection. He has gathered the

following information.

● All sales are made on credit.

● GrowMaster’s excellent record in accounts receivable collection is expected to continue, with 60 percent of billings collected in the month after

sale and the remaining 40 percent collected two months after the sale.

● Cost of goods sold, GrowMaster’s largest expense, is estimated to equal 40 percent of sales dollars. Seventy percent of inventory is purchased

one month prior to sale and 30 percent during the month of sale. For example, in April, 30 percent of April cost of goods sold is purchased and

70 percent of May cost of goods sold is purchased.

● All purchases are made on account. Historically, 75 percent of accounts payable have been paid during the month of purchase, and the

remaining 25 percent in the month following purchase.

● Hourly wages and fringe benefits, estimated at 30 percent of the current month’s sales, are paid in the month incurred.

● General and administrative expenses are projected to be $1,540,000 for the year. A breakdown of the expenses follows. All expenditures are paid

monthly throughout the year, with the exception of property taxes, which are paid in four equal installments at the end of each quarter.

Salaries and fringe benefits $ 320,000

Advertising 370,000

Property taxes 136,000

Insurance 190,000

Utilities 178,000

Depreciation 346,000

Total $ 1,540,000

● Operating income for the first quarter of the coming year is projected to be $320,000. GrowMaster is subject to a 40 percent tax rate. The

company pays 100 percent of its estimated taxes in the month following the end of each quarter.

● GrowMaster maintains a minimum cash balance of $50,000. If the cash balance is less than $50,000 at the end of the month, the company

borrows against its 12 percent line of credit in order to maintain the balance. All borrowings are made at the beginning of the month, and all

repayments are made at the end of the month (in increments of $1,000). Accrued interest is paid in full with each principal repayment. The

projected cash balance on April 1 is $50,000.

PLEASE SEE ATTACHMENT AND ANSWER THE QUESTIONS IN THE ATTACHMENT!

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