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Financial Management

7-B1 Prepare Master Budget GP 4

Victoria Kite Company, a small Melbourne firm that sells kites on the Web, wants a master budget for the three months beginning January 1, 2008. It desires an ending minimum cash balance of $5,000 each month. Sales are forecasted at an average wholesale selling price of $8 per kite. Merchandise costs average $4 per kite. All sales are on credit, payable within 30 days, but experience has shown that 60% of current sales are collected in the current month, 30% in the next month, and 10% in the month thereafter. Bad debts are negligible.

In January, Victoria Kite is beginning just-in-time (JIT) deliveries from suppliers, which means that purchases will equal expected sales. On January 1, purchases will cease until inventory decreases to $6,000, after time purchases will equal sales. Purchases during any given month are paid in full during the following month.
Monthly operating expenses are as follows:
Wages and salaries $15,000
Insurance expired 125
Depreciation 250
Miscellaneous 2,500
Rent $250/month + 10% of quarterly
sales over $10,000

Cash dividends of $1,500 are to be paid quarterly, beginning January 15, and are declared on the fifteenth of the previous month. All operating expenses are paid as incurred, except insurance, depreciation, and rent. Rent of $250 is paid at the beginning of each month, and the additional 10% of sales is paid quarterly on the tenth of the month following the end of the quarter. The next rent settlement date is January 10.

The company plans to buy some new fixture for $3,000 cash in March.

Money can be borrowed and repaid in multiples for $500 at an interest rate of 10% per annum.
Management wants to minimize borrowing and repay rapidly. Interest is compounded monthly but paid when the principle is repaid. Assume that borrowing occurs at the beginning, and repayments at the end, of the months in question. Compute interest to the nearest dollar.
Assets as of Liabilities as of
December 31, 2007 December 31, 2007
Cash $ 5000 Accounts payable
Accounts receivable 12,500 (merchandise) $35,550
Inventory* 39,050 Dividends payable 1,500
Unexpired insurance 1,500 Rent payable 7,800
Fixed assets, net 12,500 $44,850
$70, 550
*November 30 inventory balance = $16,000.

Recent and forecasted sales

October $38,000 December $25,000 February $70,000 April $45,000
November 25,000 January 62,000 March 38,000

1. Prepare a master budget including a budgeted income statements, balance sheet, cash budget, and supporting schedules for the month January 2008.
IP 4

Andre has asked you to evaluate his business, Andre's Hair Styling. Andre has five barbers working for him. (Andre is not one of them.) Each barber is paid $9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. Rent and other fixed expenses are $1,750 per month. Hair shampoo used on all clients is .40 per client. Assume that the only service performed is the giving of haircuts (including shampoo), the unit price of which is $12. Andre has asked you to find the following information.

1. Find the contribution margin per haircut. Assume that the barbers' compensation is a fixed cost. Show calculations to support your answer.
2. Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer.
3. What will be the operating income if 20,000 haircuts are performed? Show calculations to support your answer.
4. Suppose Andre revises the compensation method. The barbers will receive $4 per hour plus $6 for each haircut. What is the new contribution margin per haircut? What is the annual break-even point (in number of haircuts)? Show calculations to support your answer.

DB 4

1. Managers should base pricing decisions on both cost and market factors. In addition, they must also consider legal issues. Describe the influence that the law has on pricing decisions.
2. "It is impossible to use DCF methods for evaluating investments in research and development. There are no cost savings to measure, and we don't even know what products might come out of our R&D activities." This is a quote from an R&D manager who was asked to justify investment in a major research project based on its expected net present value. How would you respond to this statement? Do you agree or disagree? Explain.

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