a. To determine Mike Epstein's likely cash balance or deficit for the end of the year, we need to consider the starting cash balance, asset buildup, and profit. Here are the steps to calculate it:
1. Starting Cash Balance: Mike starts the year with $120,000 in the bank.
2. Asset Buildup: Since the sales are expected to double from $800,000 to $1,600,000, the asset buildup (equal to 50% of the sales increase) would be 50% of ($1,600,000 - $800,000) = $400,000.
3. Profit: The company will enjoy a 10 percent return on total sales. Therefore, the profit would be 10% of $1,600,000 = $160,000.
4. Cash Balance/Deficit: To calculate the likely cash balance or deficit at the end of the year, we add the starting cash balance, subtract the asset buildup, and add the profit: $120,000 - $400,000 + $160,000 = -$120,000.
Based on this calculation, Mike's optimistic outlook for his cash position does not appear to be correct. He is likely to end the year with a cash deficit of $120,000.
b. If there had been no increase in sales and all other facts remained the same, we can calculate Mike's ending cash balance using the same steps as above, but without considering the asset buildup:
1. Starting Cash Balance: $120,000.
2. Asset Buildup: $0 (as there is no increase in sales).
3. Profit: 10% of $800,000 (current sales) = $80,000.
4. Cash Balance/Deficit: $120,000 - $0 + $80,000 = $200,000.
The solution to these two problems illustrates the importance of sales growth in impacting the cash position of a business. Without sales growth, the cash balance remains relatively stable or improves due to profits. However, when sales grow significantly, especially when the asset buildup exceeds profit, it can result in a negative cash balance or deficit.
c. To prepare the cash budget for Buzz Air for June through September, let's calculate the monthly cash receipts and payments based on the given information and the provided formulas:
- Monthly Cash Receipts:
1. Sales for cash: 10% of total sales for the month.
2. Credit Sales collected in the month after the sale: 20% of total credit sales for the month.
3. Credit Sales collected two months later: 80% of total credit sales two months prior.
- Monthly Cash Payments:
1. Purchases paid in the month after purchase: 40% of total purchases for the month.
2. Purchases paid two months after purchase: 60% of total purchases two months prior.
3. Labor expense: 10% of current month's sales.
4. Overhead expense: $15,000 per month.
5. Interest payments, tax payments, dividends, and capital outlay (as provided).
- Cash Budget:
1. Starting Cash Balance: $20,000 in May.
2. Minimum Desired Cash Balance: $15,000.
3. Maximum Desired Cash Balance: $50,000.
Using these guidelines, you can calculate the monthly cash receipts and payments to prepare a comprehensive cash budget with borrowing and repayments for June through September.