Reference no: EM131781542

Question - Gary Siegel recently opened a steel warehouse. Gary buys his steel only after he receives a firm order from a customer; thus, Gary only buys what he sells in a particular month. Nevertheless, Gary projects that he will experience some cash flow problems toward the end of the year. While Gary is confident about the fundamentals of his business, he is wondering if he is perhaps too generous with his credit terms to customers.

Gary informs you that the currently collects 30% of revenues in the month after sale and the remaining 70% two months following the sale. Gary pays for 50% of his purchases in the month of purchase and 50% in the following month. His monthly fixed costs amount to $95,000, including $10,000 in noncash expenses. Finally, Gary marks up his products by 25% over the purchase price.

Gary provides the following information regarding projected sales for the next five months.

Aug Sept Oct Nov Dec

$468,750 $468,750 $475,000 $525,000 $562,500

a. Construct Gary's budgeted contribution margin income statement for October, November and December.

b. Construct Gary's cash budget for October, November, and December. Assume that, because of a special payment to be made at the end of the third quarter, Gary plans to begin October with $5,000 in cash on hand.

c. Explain why Gary is facing a cash flow problem even though his business is profitable. Identify two things that Gary could do to alleviate the anticipated cash crunch.