Reference no: EM13587593
Game Guys is a retail store selling video games. Sales are uniform for most of the year, but pick up in June and December, both because new releases come out and because games are purchased in anticipation of summer or winter holidays. Game Guys also sells and repairs game systems.
Almost all the service revenue is paid for by bank credit card, so Game Guys budgets this as 100% bank card revenue. The bank cards charge an average fee of 3% of the total. Half of the sales revenue is also paid for by bank credit card, for which the fee is also 3% on average. About 10% of the sales are paid in cash, and the rest (the remaining 40%) are carried on a store account. Although the store tries to give store credit only to the best customers, it still averages about 2% for uncollectible accounts; 90% of store accounts are paid in the month following the purchase, and 8% are paid two months after purchase.
Required:
1. Calculate the cash that Game Guys expects to collect in May and in June of 2012. Show calculations for each month.
2. Game Guys has budgeted expenditures for May of $4,350 for the purchase of games and game systems, $1,400 for rent and utilities and other costs, and $1,000 in wages for the two part time employees.
a. Given your answer to requirement 1, will Game Guys be able to cover its payments for May?
b. The projections for May are a budget. Assume (independently for each situation) that May revenues might also be 5% less and 10% less, and that costs might be 8% higher. Under each of those three scenarios show the total net cash for May and the amount Game Guys would have to borrow if cash receipts are less than cash payments. Assume the beginning cash balance for May is $100.
3. Suppose the costs for May are as described in requirement 2, but the expected cash receipts for May are $6,200 and beginning cash balance is $100. Game Guys has the opportunity to purchase the games and game systems on account in May, but the supplier offers the company credit terms of 2/10 net 30, which means if Game Guys pays within 10 days (in May) it will get a 2% discount on the price of the merchandise. Game Guys can borrow money at a rate of 24%. Should Game Guys take the purchasediscount?