In-Class Exercises – Cash Budgets, Capital Budgets, and Cost-Volume-Profit

Cash Budget 1 (Chapter 18)

A seasonal company has the following forecasted sales:

January $200,000
February $220,000
March $240,000

Additional information follows:

1. 80% of a month’s sales are credit sales and the remaining 20% are for cash.

2. 30% of a month’s sales are collected in the month following the sale and 70% are
collected in the second month following the sale.

3. The following disbursements are approximated for March:

a. Materials costs represent 30% of sales

b. Labor costs represent 40% of sales
c. General & Administrative costs are $20,000
d. Taxes are 5,000

Prepare a cash budget [cash receipts budget and cash disbursements budget] for March; the
beginning cash balance for the month was $10,000.

FISV 2000 In-Class Exercises – Budgets, C. Smith Page 1

Cash Budget 2 (Chapter 18)

The following information is similar to that of a small manufacturer. You will be preparing a
cash budget for Q3 of a given year (rounding is fine since these are estimates). This is an
important exercise for this company because it utilizes its line of credit to satisfy short-term
cash needs. The information follows.

Current year sales are up 5% over last year thus far, and management expects that trend to
continue through Q3. Current and prior year sales are in the chart below.

May – actual current year $450,000

June – actual current year $650,000
July – prior year $671,000
August – prior year $690,000
September – prior year $724,000

1. 90% of a month’s sales are credit/on-account sales and the remaining 10% are credit
card sales. The credit card companies deposit the funds directly into the company’s
bank account nightly, less a 2% processing fee.

2. 40% of a month’s credit sales are collected in the month following the sale and 60%
are collected in the second month following the sale.

3. Inventory purchases average 40% of total sales for the month and are paid for in the
month following the purchase.

4. Depreciation is $45,000 per month.

5. Cash paid for labor represents 30% of Sales and is paid for in the month incurred.
General & administrative expenses are paid monthly and are $55,000.

6. Estimated quarterly tax payments of $30,000 are paid in the last month of each quarter.

7. In July a piece of machinery needs to be purchased at an estimated cost of $60,000.

The company intends to pay cash for it.

8. A mid-year bonus has been calculated and will be paid in August: $75,000.

9. Each September, a retirement plan contribution is made. Management anticipates this

September’s payment to be $20,000.

10. The ending cash balance for the month of June was $21,000; the outstanding balance
on the line of credit was $30,000.

FISV 2000 In-Class Exercises – Budgets, C. Smith Page 2

Capital Budget

Your company is looking to expand both its product line and it production capacity. The
company has the capacity to fund both projects, but needs an analysis on whether each project
is expected to have positive financial results given the initial cash outlay required. The
company uses a discount rate of 16% for projects like this. Prepare a capital budget analysis
using the data below (amounts in thousands) using the Net Present Value Method and the
Payback Period. Should both projects be accepted; one or the other; or neither?

Product Line Project Production Capacity Project

Year Cash Inflows Cash Outflows Cash Inflows Cash Outflows

0 $1,950 $8,150
1 $620 300 $3,000 800
2 800 200 3,000 700
3 850 100 3,000 600
4 1,000 100 3,500 600
5 1,200 100 3,500 600

Cost-Volume-Profit Analysis

Amazon has been selling ‘That Goodbye Thing’ as a paperback for $10.00 and as a paperback
with e-book bundle for $11.00. The company has concerns with the profit margin, and is
trying to determine an appropriate selling price for each.

Material and labor costs directly associated with the production of the paperback are $3.00
and $3.60 for the e-book bundle. Total fixed costs associated with the book are $10,000
which should be allocated pro rata to each product based on the sales information below.
Management would like to earn at least $5,000 combined per month from the profit on the
book (this should also be allocated based on sales)

Expected Monthly Sales:

Description Sales in units
Paperback 1,200
Paperback with e-book Bundle 800
Total 2,000

Determine the appropriate selling prices using a cost-volume-profit analysis AND perform a
break-even analysis.

FISV 2000 In-Class Exercises – Budgets, C. Smith Page 3