Question

Problem 4-21 Schedule of cash payments [LO4-2]

The Denver Corporation has forecast the following sales for the first seven months of the year:

January	$	27,000	May	$	27,000
February		29,000	June		33,000
March		31,000	July		35,000
April		37,000

Monthly material purchases are set equal to 25 percent of forecast sales for the next month. Of the total material costs, 30 percent are paid in the month of purchase and 70 percent in the following month. Labor costs will run $5,700 per month, and fixed overhead is $10,500 per month. Interest payments on the debt will be $4,700 for both March and June. Finally, the Denver salesforce will receive a 1.50 percent commission on total sales for the first six months of the year, to be paid on June 30.

Prepare a monthly summary of cash payments for the six-month period from January through June. (Note: Compute prior December purchases to help get total material payments for January.)
  

Answer 1

Material purchases schedule

	December	January	February	March	April	May	June
Purchases	27,000 x 25/100 = 6,750	29,000 x 25/100 = 7,250	31,000 x 25/100 = 7,750	37,000 x 25/100 = 9,250	27,000 x 25/100 = 6,750	33,000 x 25/100 = 8,250	35,000 x 25/100 = 8,750

Schedule of material payment

Month	Purchases	January	February	March	April	May	June
December	6,750	6,750 x 70% = 4,725
January	7,250	7,250 x 30% = 2,175	7,250 x 70% = 5,075
February	7,750		7,750 x 30% = 2,325	7,750 x 70% = 5,425
March	9,250			9,250 x 30% = 2,775	9,250 x 70% = 6,475
April	6,750				6,750 x 30% = 2,025	6,750 x 70% = 4,725
May	8,250					8,250 x 30% = 2,475	8,250 x 70% = 5,775
June	8,750						8,750 x 30% = 2,625
	Total	6,900	7,400	8,200	8,500	7,200	8,400

Summary of cash payments for the six-month period from January through June

	January	February	March	April	May	June
Payment for material purchases	6,900	7,400	8,200	8,500	7,200	8,400
Payment for labor cost	5,700	5,700	5,700	5,700	5,700	5,700
Payment for fixed overhead	10,500	10,500	10,500	10,500	10,500	10,500
Payment for interest	0	0	4,700	0	0	4,700
Payment for sales commission	0	0	0	0	0	2,760
Total payments	23,100	23,600	29,100	24,700	23,400	32,060

Total sales for the first 6 months = 27,000 + 29,000 + 31,000 + 37,000 + 27,000 + 33,000

= $184,000

Sales commission = 184,000 x 1.5/100

= $2,760

Kindly comment if you need further assistance. Thanks