Question

Cash budgets under two alternatives Each autumn, as a hobby, Pauline Spahr weaves cotton placemats to sell at a local craft shop. The mats sell for $20 per set of four mats. The shop charges a 10% commission and remits the net proceeds to Spahr at the end of December. Spahr has woven and sold 25 sets in each of the last two years. She has enough cotton in inventory to make another 25 sets. She paid $7 per set for the cotton. Spahr uses a four-harness loom that she purchased for cash exactly two years ago. It is depreciated at the rate of $10 per month. The accounts payable relate to the cotton inventory and are payable by September 30. Spahr is considering buying an eight-harness loom so that she can weave more intricate patterns in linen. The new loom costs $1,000; it would be depreciated at $20 per month. Her bank has agreed to lend her $1,000 at 6% interest, with $200 principal plus accrued interest payable each December 31. Spahr believes she can weave 15 linen placemat sets in time for the Christmas rush if she does not weave any cotton mats. She predicts that each linen set will sell for $50 Linen costs $18 per set. Spahr's supplier will sell her linen on credit, payable December 31. Spahr plans to keep her old loom whether or not she buys the new loom. The balance sheet for her weaving business at August 31 is as follows: Pauline Spahr, Weaver Balance Sheet 2 August 31 4 Assets Current assets 6Cash 7 Inventory of cotton 8 Total current assets 9 Property, plant, and equipment 175 Pauline Spahr,Weaver Balance Sheet 2 August 31 4 Assets Current assets 6 Cash Inventory of cotton 8 Total current assets 9 Property, plant, and equipment o Loom Accumulated depreciation 175 500 240 260 460 12 Totil property, plant and equipment Total assets 6 Accounts payable 8 Total liabilities and stocikholdens' equity 13 bilities and Stoc 74 460 19 Requirements 1. Prepare a combined cash budget for the four months ending December 31, for two alternatives: weaving the placemats in cotton using the existing loom and weaving the placemats in linen using the new loom. For each alternative, prepare a budgeted income statement for the four months ending December 31 and a budgeted balance sheet at December 31. 2. On the basis of financial considerations only, what should Spahr do? Give your reason 3. What nonfinancial factors might Spahr consider in her decision?

Answer 1

SOLUTION:

	Pauline Spahr
	Cash Budget ending four month ending on December 31, 2017
				Four Harness Loom	Eight Harness Loom				Four Harness Loom	Eight Harness Loom
	Beginning Cash Balance			25	25
	Receipt from Sales			450	675		Receipt from Sales
	Loan from Bank				1000		No. of set		25	15
		Total Receipts		475	1700		Average price		20	50
									500	750
	Payment towards cotton			74	74		Less : Commission		50	75
	Payment towards linen				270				450	675
	Purchase of Eight Harness Loom				1000
	Repayment of Loan principal				200
	Payment of Interest on Loan				25		Interest on Loan		=1000*6%*5/12
		Total Payment		74	1569				25
	Ending Cash balance			401	131
	Budgeted Income statement for the four month ending December 31, 2017
				Four Harness Loom	Eight Harness Loom
	Revenue from sales			500	750
	Less :
	Cost of goods sold			175	270
	Depreication on Kiln			50	150
	Interest on Loan				25
	Commission on sales			50	75
	Total expenses			275	520
		Net Income		225	230
	Balance sheet at December 31, 2017
				Four Harness Loom	Eight Harness Loom					Four Harness Loom	Eight Harness Loom
	Asset							Accumulated depreication
	Cash			401	131			Beginning Balance		240	240
	Inventory			0	175			Add : Depreciation on Wood Mizer KD 150
	Total current Asset		A	401	306					50	50
	Property , Plant & Equipment			500	1500			Add : Depreciation on Wood Mizer KD 250
	Less : Accumulated Depreciation			290	390						100
		Total PP & E	B	210	1110					290	390
	Total Asset		A+B	611	1416
	Liabilities
	Current Liabilties
	Accounts Payable			0	0
	Total Current Liabilties			0	0
	Non Current liabilties
	Loans from Bank				800
	Total Non current liabilties				800
	Stockholder's equity
	Retained earnings
		Beginning		386	386
	Add : Net Income			225	230
	Total Liabilities & Stockholder's equity			611	1416
Requirement 2
	On the basis of financial consideration, Spahr should go for Eight Harness Loom as it is giving more additonal Income
Requirement 3
	Non-Financial factor, Spahr should consider are as follows
	What she will do next year and on which loom
	Will she ever use her four harness loom again as she might start liking eight harness loom
	What she will do with her cotton Inventory, if she continue with Linen sets in future

if you have any query please ask me in comment box i am here to helps you don't give direct Thumbs down.if you satisfied my work give Thumbs UP.

#THANK YOU#