Question

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Mellon Company's financial managers are meeting with the company's bank to renew their line of credit and discuss their investment needs. They have prepared the company's operating cash budget for the last six months of the year The following budget assumptions were used to construct the budget: Mellon's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. * Mellon's sales are made on credit with terms of 2/10, net 30, Mellon's experience is that 20% is collected from customers who take advantage of the discount, 70% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts. The cost of materials averages 45% of Mellon's finished product. The purchases are generally made one month in advance of the sale, and Mellon paysits suppliers in 30 days. Accordingly, if July sales are forecasted at $1,210 million, then purchases during June would be $545 ($1,210 million x 0.45), and this amount would be paid in July. * Other cash expenses include wages and salaries at 15% of sales, monthly rent of $44 million, and other expenses at 5% of sales. Estimated tax payments of $64 million and $67 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,100 million payment for a new plant must be made in September . Assume that Mellon's targeted cash balance is丰318, and the estimated cash on hand on July 1 is $318. Use the preceding information to fill in the missing amounts in the following cash budget.

Answer 1

Mellon Company
Cash Budget
For the Six Months Ended December 31, Year 1
	May	June	July	August	September	October	November	December
Credit Sales	1,045	1,078	1,100	1,111	1,133	1,155	1,188	1,210
Credit Purchases		495	500	510	520	535	545
			July	August	September	October	November	December
Cash Receipts
Collections from Month's Sales			216	218	222	226	233	237
Collections from Previous Month's Sales			755	770	778	793	809	832
Collections from Sales Two Months Previously			105	108	110	111	113	116
Total Cash Receipts			1,076	1,096	1,110	1,130	1,155	1,185
Cash Disbursements
Payment for Credit Purchases			495	500	510	520	535	545
Wages and Salaries			165	167	170	173	178	182
Rent			44	44	44	44	44	44
Other Expenses			55	56	57	58	59	61
Taxes			64			67
Payment for Plant Construction					1,100	0
Total Cash Disbursements			823	767	1881	862.25	816	832
Net Cash Flow			253	329	-771	268	339	353
(Receipts - Disbursements)
Beginning Cash Balance			318	571	900	129	397	736
Ending Cash Balance			571	900	129	397	736	1089
Target (Minimum) Cash Balance			318	318	318	318	318	318
Surplus (Shortfall) Cash			253	582	-189	79	418	771
Mellon Company will be able to invest in short term marketable securities in some months and will need to borrow to cover cash requirements in others in the last six months of the year, Mellon will generate $771M (Net Cash flow) to end the year with a cash balance of $1,089M and cash surplus of $771M(refer to surplus (shortfall) cash section in December). Mellon Company will want a credit line of at least $189M (refer to surplus (shortfall) cash section in September) to cover the month with the greatest shortfall, and the financial mangers can tell the bank to expect that they will be able to invest up to $771Min short term marketable securities (refer to surplus (shortfall) cash section in December).