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Cash Budget Kota Fibres produces nylon fiber at its only plant in Kota, India, and
is preparing its cash budget for the month of September 2003 through December 2003.
Expected sales from September 2003 to February 2004, as well as realized sales in July
and August 2003 are depicted in Table 2 (in thousands of rupees (Rs)). For delivery
and manufacturing reasons, Kota's purchases, which usually amount to 70% of sales,
have to be made two months in advance and the material has to be paid in cash,
i.e. Kota's actual supplier does not provide any credit at all. Collections of accounts
receivables, on the other hand, are as follows: The cash from 40% of sales is collected
after one month and the remaining 60% is collected after two months. Kota has a line
of credit with Bank of India but no other type of debt. The interest it pays each month
is computed as
1.25% × Line of Credit Balance at the End of the Previous Month.
Other cash expenses are as follows:
? Wages are 35% of the previous month purchases (there are no other salaries).
That is, the production cycle is as follows: Raw material is purchased in a given
month, processed by the employees in the following month and sold the month
after (this could be improved, of course).
? Rent is Rs10,000 per month.
? A dividend of Rs20,000 will be paid to Kota's shareholders (mainly family members)
at the end of September and at the end of December.
? A tax payment of Rs25,000 will be made in November.
? A fixed asset outlay of Rs150,000 is expected in October.
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In order to keep its line of credit with Bank of India, Kota must clear it before the end
of December. Failure to do so would result in th ...