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FIN622 Assignment 1 Solution Spring 2017

Question:

Blue Private Limited company is in a packaging business and manufacturer of cardboard boxes for a courier service. The company has received a large packaging order and anticipates the need to go to its bank to increase its borrowings. Thus, the financial manager of the company has been given the task to forecast the cash requirements. In case, if minimum cash balance for each month is less than Rs. 15,000, the company will be required to borrow the deficit at the rate of 10% annually from the bank.

Following information has been provided to the financial manager for the month of July: Month of July Amount (Rs.) Closing balance 6,000 Actual Sales 80,000 Raw material expense 28,000 Labor cost 40,000 Selling and administrative expenses 18,000 Depreciation expense 9,000 In addition to above information, following are the estimates for the month of August and September:

• Estimated Sales for the month of August and September are Rs. 120,000 and Rs. 138,000 respectively.

• The company will purchase labelling machine worth Rs. 50,000 in August. Its payment will be made in October.

• Raw material cost is expected to be increased by Rs. 8,000 each month.

• Labor cost will be raised to Rs. 50,000 for the respective months.

• Selling and administrative expenses will increase by Rs. 3,000 per month.

• Old labelling machine will be sold in August for Rs. 29,000 and proceeds will be received in September.

• Depreciation expense will remain unchanged.

Credit Extension Policy of the company is as under: Normally, the company collects 50% of Sales on cash basis, and 50% on one-month credit basis. Credit terms of the company are as under: Working Capital Requirements Credit terms Raw material expense payable 1-month Selling and administration expenses payable Paid in the month of incurrence Labor cost payable 1-month Depreciation expense payable Paid in the month of incurrence

Requirement: 1. Prepare cash budget of Blue Private Limited company for the month of August and September. 2. Does company require to borrow funds to finance the deficit? Provide reasoning.

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