FIN 302-Tutorial 3

1. Ben Jankies, manager of BJ Cleaning Services, is planning to request a loan from

his bank for his company. He has been asked to prepare a 3 month cash budget from
July to September. Ben has made the following preliminary forecasts for the
company;

Month Sales (P) Raw materials Costs (P)

May P160 000 P80 000
June 180 000 90 000
July 360 000 126 000
August 540 000 882 000
September 720 000 306 000

The following information has also been provided from other sections of the
company;
1. Collection estimates from Credit Department are as follows;
a. Collections within the month, 10% of sales, with a 5% discount
b. Collections the month following the sale, 75% of sales
c. Collections the second month following sale, 15% of sales
2. Payments for raw materials from Supplies are made the month following the
sale, in two unequal instalments, 70% first instalment paid the following
month and 30% second instalment paid in the subsequent month. Estimates
for raw purchases are shown in the above table.
3. Salaries will amount to P27 000 per month, rent amounts to P9 000 per month,
other expenses will amount to P2 700 per month; and are all paid same month
they are incurred.
4. Income tax payment of P50 000 will be paid in August and another payment
for cleaning chemicals amount to P80 000 will be paid in September.
5. Cash on hand in July 1 is P 132 000 and a minimum cash balance of P70,000
will be maintained throughout the period.

Required

You are required to assist Ben to prepare a three month cash budget for July August
and September and comment on the outcome

Comment: For the three months under investigation the company will be having a
positive cash out flow which might call for investing excess cash in marketable
securities.
2 Nortex Investments produces garments mainly for the US market. The following
information has been generated as forecast for the company operations.

Feb March April

Sales Forecasts 300 000 380 000 260 000

The following additional information is available:

i) All sales are on credit basis
 20% of sales are collected in the month of the sale and are entitled to a
2% discount
 70% of sales are collected in the month following the sale and are not
entitled to any discount
 10% of sales are collected on the second month after the sale.
ii) January sales were P200 000.
iii) The Closing cash balance in January was Zero
iv) All purchases are paid for in two equal instalments (with the instalments
due in the two consecutive months following the time of purchase). Direct
material purchases are estimated at 40% of monthly gross sales.
v) Monthly Operating expenses:
 Wages 10% of sales
 Salaries are on a monthly sales commission of 2.5% of total monthly
sales.
 Overheads are estimated at 15% of monthly sales.
 All monthly operating expenses are due in the month in which they are
incurred.
vi) A cash dividend payment of P100 000 was declared in January and is
payable in February.
vii) It is company policy to maintain a monthly target cash balance of P90 000

You are required to prepare a cash budget for Nortex Investments for the
months of Feb, March and April and make recommendations for management.

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3. Bokomo purchases bags of sorghum from Mr De Vre, who is a commercial farmer based
in Mosisidi farms at a cost of P100 per bag. Bokomo needs 70,000 bags of sorghum per year.
The storage cost for the warehouse is P7.50 per bag and the cost of preparing a purchase
order and invoice stands at P5.50 per order. Electricity and other utilities amount to P525 per
month. Mr De Vre has offered a 10% cash discount of the purchase price but only for orders
of at least 5,000 bags.

Should Bokomo purchase in orders of 5,000 bags? Justify your answer.

4. The following inventory data has been established for company XYZ.

i. Orders must be placed in multiples of 100 units

ii. Annual sales are 338, 000 units
iii. Purchase price per unit is P3
iv. Carrying cost is 20% of the purchase price of goods
v. Cost per order placed is P24
vi. Desired safety stock 14,000 units, this amount is not on hand initially.
vii. Two weeks are required for delivery

Required:

1. To minimised total inventory costs how many units should be ordered

each time the company runs out of stock?

2. At what inventory level should a reorder be made?

3. How may orders should the firm place each year?

4. Calculate total inventory costs given the following order quantities. (1)
4,000 units, (2) 4,800 units, (3) 6,000 units and (4) 6,500 units.
Compare these costs with the total costs incurred using EOQ.