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ABC Inc., is a retailer that sells sound systems. The company is planning its cash needs for the month of January, 2014. In the past, ABC Inc. has had to borrow money during the post-Christmas season to offset a significant decline in sales. The following information has been assembled to prepare a cash flow forecast for January.
January 2014 forecasted income statement:
Sales $400,000
Cost of goods sold 300,000
Gross profit 100,000
Variable selling expenses $10,000
Fixed administrative expenses 80,000 90,000
Forecast net operating income $ 10,000
Sales are 10% for cash and 90% on credit.
Credit sales are collected over a three-month period with 40% collected in the month of sale, 30% in the following month, and 20% in the second month following sale. The remainder is never collected. November 2013 sales totaled $300,000 and December sales totaled $500,000.
The company maintains its ending inventory levels at 60% of the cost of the merchandise to be sold in the following month. The merchandise inventory at December 31, 2013 was $180,000. February 2014 sales are budgeted at $200,000. Gross profit percentage is expected to remain unchanged.
40% of a month's inventory purchases are paid in the same month. The remaining 60% are paid in the following month. Accounts payable relate solely to inventory purchases. At December 31, accounts payable totaled $135,000.
The company pays a $10,000 monthly cash dividend to shareholders.
The cash balance at December 31, 2013 was $30,000; the company must maintain a cash balance of at least this amount at the end of each month.
Fixed administrative expenses include depreciation expense of $2,000 per month.
The company can borrow on its operating loan in increments of $1,000 at the beginning of each month, up to a total loan balance of $500,000. The interest rate on this loan is 1% per month. There is no operating loan at December 31, 2013.
Required: Calculate the amount that will need to be borrowed in January 2014.Show calculations.
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