The Carlquist Company makes and sells a product called Product K. Each unit of Product K sells for $24 dollars and has a unit variable cost of $18. The company has budgeted the following data for November:
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• | Sales of $1,737,000, all in cash. |
• | A cash balance on November 1 of $44,000. |
• | Cash disbursements (other than interest) during November of $1,706,500. |
• | A minimum cash balance on November 30 of $130,000. |
If necessary, the company will borrow cash from a bank. The borrowing will be in multiples of $1,000 and will bear interest at 2% per month. All borrowing will take place at the beginning of the month. The November interest will be paid in cash during November.
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The amount of cash needed to be borrowed on November 1 to cover all cash disbursements and to obtain the desired November 30 cash balance is:
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$148,000 | |
$56,000 | |
→ | $57,000 |
Cash Budget |
Cash balance, beginning | $ 44,000 |
Add cash receipts (all sales are for cash) |
1,737,000
|
Total cash available | 1,781,000 |
Less cash disbursements |
1,706,500
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Excess (deficiency) of cash available over disbursements | 74,500 |
Interest (2% × $57,000*) |
1,140
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Cash balance before financing | 73,360 |
Financing |
57,000
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Cash balance, ending |
$ 130,360
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*Since the company desires an ending cash balance of at least $130,000, the excess of cash available over disbursements is $74,500, and cash must be borrowed in multiples of $1,000, it would appear that the company must borrow at least $57,000. The remainder of the computations establish that this borrowing will suffice, including the interest on the borrowing.
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