Extra Homework Question: Chapter 6

Level Production and related Financing Costs

The Terminator Snowmobile Company

I introduced this problem in class. Here’s the information to complete the question.

The company sells snowmobiles at $4,000 per unit according to the unit sales per month schedule as follows: January 3000 units; February 2500 units; March 1100 units; April 300 units; May 200 units; June 100 units; July 50 units; August 0 units; September 50 units; October 600 units; November 1800 units; and December 2300 units.

First, prepare a level production and inventory plan, given beginning inventory in January of 3800 units.

Sales per month are 10% cash, 20% collected in 30 days, and 70% collected in 60 days. Production costs are $2,000 per unit, and costs are paid in the same month as production. Other cash outlays are: overhead, $500,000 per month; dividends, $500,000 paid in April and October; interest, $ 1 million, paid in April and September; mortgage payment, $2 million in April and September; and taxes, $900,000 paid in January, April, July, and October.

Second, prepare a schedule of monthly cash receipts, payments, and net cash flows.

Cash management procedures are as follows. If cash balances are above $1 million, cash is used to purchase short term securities. Minimum cash balances are $200,000. If there is a cash shortfall, short term securities are sold first to cover a shortfall, before borrowing funds. The beginning cash balance in January is $500,000.

Third, prepare a schedule of monthly net cash flows, securities purchases and sales, and monthly borrowings and repayments.

Fourth, prepare schedules of current assets by month, including cash, accounts receivable, inventory, and short term securities.