Cash Budget: Barker Corporation

Cash Budget:

1. Prepare a schedule that forecasts the cash position at December 31, 20X0. What action, if any, will be required to maintain a $10,000 cash balance?

2. Without regard to your answer in requirement 1, assume Barker regularly needs to arrange short-term loans during the November to February period. What changes might Barker consider in its methods of doing business to reduce or eliminate the need for short-term borrowing?

Case:

The Barker Corporation manufactures and distributes wooden baseball bats. The bats are manufactured in Georgia at its only plant. This is a seasonal business with a large portion of its sales occurring in late winter and early spring. The production schedule for the last quarter of the year is heavy to build up inventory to meet expected sales volume.
The company experiences a temporary cash strain during this heavy production period. Payroll costs rise during the last quarter because overtime is scheduled to meet the increased production needs. Collections from customers are low because the fall season produces only modest sale, This year the company's concern is intensified because prices are increasing during the current inflationary period. In addition, the sales department forecasts sales of fewer than 1 million bats for the first time in three years. This decease in sales appears to be caused by the popularity of aluminum bats.
The cash account builds up during the first and second quarters as sales exceed production. The excess cash is invested in U.S. Treasury bills and other commercial paper. During the last half of the year, the temporary investments are liquidated to meet the cash needs. In the early years of the company, short-term borrowing was used to supplement the funds released by selling investments, but this has not been necessary in recent years. Because costs are higher this year, the treasurer asks for a forecast for December to judge if the $40,000 in temporary investments will be adequate to carry the company through the month with a minimum balance of $10,000. Should this amount ($40,000) be insufficient, she wants to begin negotiations for a short-term loan.
The unit sales volume for the past two months and the estimate for the next four months are:

October (actual) 70,000
November (actual) 50,000
December (estimated) 50,000
January (estimated) 90,000
February (estimated) 90,000
March (estimated) 120,000

The bats are sold for $3 each. All sales are made on account. Half of the accounts are collected in the month of the sale, 40 percent are collected in the month following the sale, and the remaining 10 percent in the second month following the sale. Customers who pay in the month of sale receive a 2 percent cash discount.
The production schedule for the six-month period beginning with October reflects the company's policy of maintaining a stable year-round workforce by scheduling overtime to meet the following production schedules:

October (actual) 90,000
November (actual) 90,000
December (estimated) 90,000
January (estimated) 90,000
February (estimated) 100,000
March (estimated) 100,000

The bats are made from wooden blocks that cost $6 each. Ten bats can be produced from each block. The blocks are acquired one year in advance so they can be properly aged. Barker pays the supplier one-twelfth of the cost of this material each month until the obligation is retired. The monthly payment is $60,000.
The plant is normally scheduled for a forty-hour, five-day work week. During the busy production season, however, the work week may be increased to six 10-hour days. Each worker can produce 7.5 bats per hour. Normal monthly output is 75,000 bats. Factory employees are paid $4 per hour (up $0.50 from last year) for regular time and time and one-half for overtime.
Other manufacturing costs include variable overhead of $0.30 per unit and annual fixed overhead of $280,000. Depreciation charges totaling $40,000 are included among the fixed overhead. Selling expenses include variable costs of $0.20 per unit and annual fixed costs of $60,000. Fixed administrative costs are $120,000 annually. All fixed costs are incurred uniformly throughout the year. The controller has accumulated the following additional information:

1. The balances of selected accounts as of November 30, 20X0, are

Cash $ 12,000
Marketable securities (cost and market are the same/ 40,000
Accounts receivable 96,000
Prepaid expenses 4,800
Accounts payable (arising from raw material purchases) 300,000
Accrued vacation pay 9,500
Equipment note payable 102,000
Accrued income taxes payable 50,000
2. Interest to be received from the company's temporary investments is estimated at $500 for December.
3. Prepaid expenses of $3,600 will expire during December, and the balance of the prepaid account is estimated at $4,200 for the end of December.
4. Barker purchased new machinery in 20X0 as part of a plant modernization program. The machinery was financed by a 24-month note of $144,000. The terms call for equal principal payments over the next 24 months with interest paid at the rate of 1 percent per month on the unpaid balance at the first of the month. The first payment was made on May 1, 20X0.
5. Old equipment, which has a book value of $8,000, is to be sold during December for $7,500.
6. Each month the company accrues $1,700 for vacation pay by charging Vacation Pay Expense and crediting Accrued Vacation Pay. The plant closes for two weeks in June when a11 plant employees take a vacation.
7. Quarterly dividends of $0.20 per share will be paid on December 15 to stockholders of record. Barker Corporation has authorized 10,000 shares. The company has issued 7,500 shares, and 500 of these classified as treasury stock.
8. The quarterly income taxes payment of $50,000 is due on December 15, 20X0.