Problem

Cash Flow Analysis; Sensitivity Analysis CompUSA, Inc., sells computer hardware. It also m...

Cash Flow Analysis; Sensitivity Analysis CompUSA, Inc., sells computer hardware. It also markets related software and software-support services. The company prepares annual forecasts for sales, of which the first six months of 2016 are given below.

In a typical month, total sales are broken down as follows: cash sales, 30%; VISA^® credit card sales, 65%; and 5% open account (the company’s own charge accounts). For budgeting purposes, assume that cash sales plus bank credit card sales are received in the month of sale; bank credit card sales are subject to a 3% processing fee, which is deducted daily at the time of deposit into CompUSA’s cash account with the bank. Cash receipts from collection of accounts receivable typically occur as follows: 20% in the month of sale, 50% in the month following the month of sale, and 27% in the second month following the month of sale. The remaining receivables generally turn out to be uncollectible.

CompUSA’s month-end inventory requirements for computer hardware units are 30% of the following month’s estimated sales. A one-month lead time is required for delivery from the hardware distributor. Thus, orders for computer hardware units are generally placed by CompUSA on the 25th of each month to ensure availability in the store on the first day of the month needed. These units are purchased on credit, under the following terms: n/45, measured from the time the units are delivered to CompUSA. Assume that CompUSA takes the maximum amount of time to pay its invoices. On average, the purchase price for hardware units runs 60% of selling price.

Required

1. Calculate estimated cash receipts for April 2016 (show details).
2. The company wants to estimate the number of hardware units to order on January 25th.
a. Determine the estimated number of units to be ordered.
b. Calculate the dollar cost (per unit and total) for these units.
3. Cash planning in this line of business is critical to success. Management feels that the assumption of selling price per unit ($3,000) is firm—at least for the foreseeable future. Also, it is comfortable with the 30% rate for end-of-month inventories. It is not so sure, however, about (a) the CGS rate (because of the state of flux in the supplier market), and (b) the level of predicted sales in March 2016. Discussions with marketing and purchasing suggest that three outcomes are possible for each of these two variables, as follows:
The preceding outcomes are assumed to be independent, which means that there are nine possible combinations (3 × 3). You are asked to conduct a sensitivity analysis to determine the range of possible cash outflows for April 10^th, under different combinations of the above. Assume, for simplicity, that sales volume for April is fixed. Complete the following table:
4. As part of the annual budget process, CompUSA, Inc., prepares a cash budget by month for the entire year. Explain why a company such as CompUSA would prepare monthly cash flow budgets for the entire year. Explain the role of sensitivity analysis in the monthly planning process.