Cynthia Valley formed Out-West Products, Inc. (OWP) in 2020 when she obtained an exclusive franchise to nationally distribute a pen-based input device that provides effortless communication with standard personal computers. Recent high sales growth of the base model pen-based input device (PID-B), along with expected sales growth for a new premium model (PID-P), requires adding new management team members. The Company hires you as a management trainee to assume direct responsibility for financial planning activities. Your first assignment is to prepare a financial plan for the next three months, starting July 1.
CASH COLLECTION PATTERN is as follows:
30% of a month’s sales are collected by month-end. An additional 40% is collected in the month following, and the remaining 30% is collected in the second month following sale. Thus far bad debts have been negligible.
Since OWP’s policy is to never stock out of its pen-based input devices (PIDs), and potentially forfeit market share to competitors, the Company maintains fairly high inventory levels.
Therefore, desired ending inventories are equal to 70% of the next month’s sales in units.
Prior to June, OWP sold only the basic model PID-B at a price of $230 per unit. The PID-B costs OutWest Products $155 each from the manufacturer and it pays for purchases as follows:
CASH Disbursements PATTERN is as follows:
60% in the month of purchase and the remaining 40% the following month.
The company’s monthly operating expenses (organized by cost behavior) are also provided in the Assumptions Sheet of the excel template. All operating expenses are paid during the month, in cash, with the exception of depreciation and insurance expenses.
New fixed assets, including personal computers and office furniture, will be purchased during September for $90,000 cash. Ignore depreciation for these newly acquired since they are insignificant. The Company declares dividends of $20,000 each quarter, payable in the first month of the following quarter.
OWP’s actual balance sheet at June 30, 2020 is provided at the end of the template’s Assumptions Sheet.
However, the Company also desires a minimum ending cash balance each month of $35,000 to meet regular operating expenses. Assume borrowings occur at the beginning of the period. To further simplify, assume no tax consequences.
Complete Sheet 2 (Schedules)
- Sales and merchandise purchase plans with supporting schedules.
- A sales plan by month and in total – including a schedule of projected cash collections from sales
and accounts receivable, by month and in total.
- A purchases plan in units and in dollars, including a schedule of projected cash payments for
purchases, by month and in total.
[Note: The cost of inventory on hand is released to cost of goods sold before costs for the purchase of additional units (i.e., use a FIFO cost flow assumption for all months).]