Cash Budget Problem (50 points)

The Teletron Corporation manufactures different types of printers for personal computers. The company is planning its cash needs for the first quarter of 2006. In the past, Teletron has had to borrow money during the first quarter since sales peak during this period of time. It would like to be aware of any potential cash shortages before they occur.

The Controller asks you, the Senior Budgeting Accountant, to prepare a Cash budget for January, February, and March 2006 for the entire company. Today is December 1, 2005 and you have just met with other employees from the Purchasing, Production, Marketing, and Finance departments. From this meeting you compiled the following table of information (all based on estimates).

| |2005 |2005 |2006 |2006 |2006 |
| |Nov |Dec |Jan |Feb |Mar |
|Raw Materials Purchases |$ 20,000 |$ 25,000 |$ 25,000 |$ 20,000 |$ 25,000 |
|Direct Labor Hours |1,600 hrs |1,760 hrs |1,760 hrs |2,240 hrs |1,760 hrs |
|Factory Overhead Costs |$ 4,000 |$ 4,000 |$ 4,000 |$ 4,000 |$ 4,000 |
|Selling & Administrative Expenses |$ 10,000 |$ 12,000 |$ 12,000 |$ 10,000 |$ 12,000 |
|Sales to customers |$ 100,000 |$ 110,000 |$ 120,000 |$ 110,000 |$ 100,000 |

Monthly sales to clients are expected to be collected as follows: 60% in the first month following the sale; 30% in the second month following the sale; and 10% in the third month following the sale. Note that October 2005 sales to customers totaled $ 90,000.

Raw Material Purchases are expected to be paid as follows: 50% in the month of the purchase; 50% in the following month.

The production workers make $ 25 per hour. There is no overtime and all wages are paid in the month they are incurred.

Factory Overhead Costs are paid in the month following the month they are incurred.

Selling & Administrative Expenses are paid in the month in the month they are incurred.

Teletron plans on borrowing $ 100,000 from its bank and will receive the money on January 1, 2006. The loan is due to be paid back in 2008 in a lump sum payment. The yearly interest rate will be 12% and interest will be paid each month (assume the same interest expense each month regardless of the number of days in each month).

Teletron plans on making two $ 75,000 federal income tax payments during 2006 – one in January 2006 and the other one in June 2006.

Teletron plans on paying $ 200,000 cash for the purchase of new production machinery in February 2006.

Teletron plans on issuing (selling) 30,000 new shares of common stock in March 2006. The sales price is expected to be $ 25 per share.

Teletron expects its cash balance on December 31, 2005 to be $ 45,000.

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Requirements:

1. Prepare a cash budget for Teletron for each month of the first quarter 2006 (i.e. January, February, and March 2006).

2. Comment on whether the ending cash balances each month are adequate for Teletron’s cash needs and what Teletron might do in a month where the estimated cash balance is negative.