Question

Crane Company prepares monthly cash budgets. Relevant data from operating budgets for 2022 are as follows.

January

February

Sales $374,400 $416,000
Direct materials purchases 124,800 130,000
Direct labor 93,600 104,000
Manufacturing overhead 72,800 78,000
Selling and administrative expenses 82,160 88,400

All sales are on account. Collections are expected to be 50% in the month of sale, 30% in the first month following the sale, and 20% in the second month following the sale. Sixty percent (60%) of direct materials purchases are paid in cash in the month of purchase, and the balance due is paid in the month following the purchase. All other items above are paid in the month incurred except for selling and administrative expenses that include $1,040 of depreciation per month.

Other data:
1. Credit sales: November 2021, $260,000; December 2021, $332,800.
2. Purchases of direct materials: December 2021, $104,000.
3. Other receipts: January—Collection of December 31, 2021, notes receivable $15,600; February—Proceeds from sale of securities $6,240.
4. Other disbursements: February—Payment of $6,240 cash dividend.

The company’s cash balance on January 1, 2022, is expected to be $62,400. The company wants to maintain a minimum cash balance of $52,000.

Answer 1

The firm's accounting profit can be calculated by subtracting the total explicit costs from the total revenues. In this case, the firm's accounting profit is $50,000.

Step-by-step explanation:

The firm's accounting profit can be calculated by subtracting the total explicit costs from the total revenues. In this case, the total explicit costs include labor ($600,000), capital ($150,000), and materials ($200,000), resulting in $950,000. The total revenues are $1 million. Therefore, the firm's accounting profit is $1 million - $950,000 = $50,000.

Answer 2

The cash budget shows a significant deficiency in both January and February.

Crane Company Cash Budget for 2022

January 2022

Item Amount

Cash balance, January 1 $62,400

Receipts:

Sales collections (50% of December 2021 sales) $166,400

Collection of December 31, 2021, notes receivable $15,600

Total receipts $182,000

Disbursements:

Purchases of direct materials (60% of December 2021 purchases) $62,400

Direct labor $93,600

Manufacturing overhead $72,800

Selling and administrative expenses $81,120

Cash dividend $0

Total disbursements $309,920

Excess (deficiency) of cash ($127,920)

February 2022

Item Amount

Cash balance, February 1 (deficiency) ($127,920)

Receipts:

Sales collections (50% of January 2022 sales + 30% of December 2021 sales) $260,880

Proceeds from sale of securities $6,240

Total receipts $267,120

Disbursements:

Purchases of direct materials (40% of December 2021 purchases + 60% of January 2022 purchases) $41,600

Direct labor $104,000

Manufacturing overhead $78,000

Selling and administrative expenses $87,360

Cash dividend $6,240

Total disbursements $317,200

Excess (deficiency) of cash ($49,080)

Analysis:

The cash budget shows a significant deficiency in both January and February.

The company needs to take action to improve its cash flow, such as:

Reducing its inventory of direct materials.

Negotiating better payment terms with suppliers.

Collecting receivables more quickly.

Delaying non-essential expenditures.