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Reasons for holding cash and the need for cash budgeting

I. Winner Where She Goes, Inc. is considering an investment of $800,000 in a new equipment line for boning and packaging beef products. The equipment has an expected life of 5 years. Sales are expected to be 900,000 units per year, at a price of $3 per unit. Fixed costs excluding depreciation are $300,000 per year, and variable costs are $1.80 per unit. The equipment will be depreciated over 5 years using the straight line method with a salvage value of zero. The corporation pays income tax at a rate of 34%.
Find out:
a) Total costs
b) Total Revenues
c) Operation Profit (EBIT)
d) Net income after tax and interest.
e) Break-Even Units and dollars (Hint: BE (Units)= Fixed cost/price per unit - variable cost per unit)

II. Every organization knows the significant of a cash budget and how it can determine the future business.
Analyze the reasons for holding cash and underlie the need for cash budgeting. Discuss these questions:
a) What information is needed to prepare a cash budget?
b) What is the relationship between an operating and a cash budget?
c) Why is it important for an organization to prepare a cash budget?

Solution Summary

The total costs, total revenues, operation profits, net income and break even units are calculated.