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Flit Co is preparing a cash flow forecast for the three-month period from January to the end of March. The following sales volumes have been forecast:

 

December

January

February

March

April

Sales (units)

1,200

1,250

1,300

1,400

1,500

Notes:

  1. The selling price per unit is $800 and a selling price increase of 5% will occur in February. Sales are all on one month's credit.
  2. Production of goods for sale takes place one month before sales.
  3. Each unit produced requires two units of raw materials, costing $200 per unit. No raw materials inventory is held. Raw material purchases are on one months' credit.
  4. Variable overheads and wages equal to $100 per unit are incurred during production, and paid in the month of production.
  5. The opening cash balance at 1 January is expected to be $40,000.
  6. A long-term loan of $300,000 will be received at the beginning of March.
  7. A machine costing $400,000 will be purchased for cash in March.

Requirements:

a

(i) Calculate the cash balance at the end of each month in the three-month period. (5 marks)

(ii) Calculate the forecast current ratio at the end of the three-month period. (2 marks)

Marks: 7
b

Assuming that Flit Co expects to have a short-term cash surplus during the three-month period, discuss whether this should be invested in shares listed on a large stock market.        

 

Marks: 3
c

Explain how the Baumol model can be employed to reduce the costs of cash management.  

    Marks: 5
    d

    Renpec Co, a subsidiary of Flit Co, has set a minimum cash account balance of $7,500. The average cost to the company of making deposits or selling investments is $18 per transaction and the standard deviation of its cash flows was $1,000 per day during the last year. The average interest rate on investments is 5.11%.

    Determine the spread, the upper limit and the return point for the cash account of Renpec Co using the Miller-Orr model and explain the relevance of these values for the cash management of the company.

    Marks: 5

    Answers submitted

    Created by Ref Marking Action
    Rakhi Gupta's picture
    Rakhi Gupta
    10/19/2020 - 09:45
    a
    9844
    7
    Rakhi Gupta's picture
    Rakhi Gupta
    10/19/2020 - 09:54
    b
    9846
    3
    Rakhi Gupta's picture
    Rakhi Gupta
    10/19/2020 - 10:27
    c
    9848
    5
    Rakhi Gupta's picture
    Rakhi Gupta
    10/19/2020 - 10:38
    d
    9850
    5
    Rakhi Gupta's picture
    Rakhi Gupta
    10/04/2020 - 22:24
    a
    9756
    7
    Rakhi Gupta's picture
    Rakhi Gupta
    10/04/2020 - 22:29
    b
    9758
    3
    Rakhi Gupta's picture
    Rakhi Gupta
    10/04/2020 - 22:42
    c
    9760
    5
    Rakhi Gupta's picture
    Rakhi Gupta
    10/04/2020 - 23:38
    d
    9762
    5
    Apurba nandy's picture
    Apurba nandy
    03/03/2020 - 16:52
    a
    9018
    7
    Kamrunnahar Takia's picture
    Kamrunnahar Takia
    02/09/2020 - 21:13
    a
    8560
    7
    Kamrunnahar Takia's picture
    Kamrunnahar Takia
    02/09/2020 - 21:32
    b
    8570
    3
    Kamrunnahar Takia's picture
    Kamrunnahar Takia
    02/09/2020 - 21:46
    c
    8574
    5
    Kamrunnahar Takia's picture
    Kamrunnahar Takia
    02/09/2020 - 22:01
    d
    8592
    5
    Md Ishtiak Isty's picture
    Md Ishtiak Isty
    02/09/2020 - 21:18
    a
    8550
    7
    Md Ishtiak Isty's picture
    Md Ishtiak Isty
    02/09/2020 - 21:31
    b
    8564
    3
    Md Ishtiak Isty's picture
    Md Ishtiak Isty
    02/09/2020 - 21:48
    c
    8580
    5
    Md Ishtiak Isty's picture
    Md Ishtiak Isty
    02/09/2020 - 22:01
    d
    8590
    5