Question:The Marsh company makes standard size 2 inch fasteners,which it sells for $155 per thousand.

Mr. Marsh is the majority owner and manages the inventory and finances of the company. He
Estimates sales for the following months to be.

Month

Fasteners

Jan

$263,000

1,700,000

Feb

$186,000

1,200,000

Mar

$217,000

1,400,000

April

$310,000

2,000,000

May

$387,500

2,500,000

Last year Marsh corp sales were $175,000 in November and $232,500 in December.(1,500,000
fasteners.
Mr. Marsh is preparing for a meeting with his banker to arrange the financing for the first quarter.
Based on his sales focast and the following information he provided please prepare a monthly cash
budget,
monthly and quaterly pro forma income statements, a pro forma quarterly balance sheet and all the
necessary supporting schedules for the first quater.

Past histroy shows that the Marsh corp collects 50 % of it accounts recievable in the normal 30 day
period( the month after the sale)and the other 50 % in 60 days. It pays for materials 30 days after
receipt. In general mr. Marsh likes to keep a 2 months supply in inventory in anticipation of sales.
Inventory at the begining of December was 2,600,000 units.

The major cost of the production is the purchase of raw materials in the form of stell rods,which
are cut threaded and finished.last year raw material costs were $ 52.00 per 1,000 fasteners but mr.
Marsh
has just been notifed that material cost have risen,effective January1,to $60.00 per 1,000 fasteners.
The March
corp uses fifo inventory accounting. Labor costs are relitivly constant at $20.00 per thousand
fasteners,
since workers are paid on a piece work basis.

Over head is allocated at $10.00 per thousand units and selling and administrative expense is 20% os
sales.
Labor expenses and overhead are direct cash outflows paid in the month incurred,while intrest and

taxes are paid

quaterly.

The corp usually maintains a min cash budget of 25,000 and it puts its excess cash into marketable
securities
The average tax rate is 40% and mr, marsh usaullt pays out 50% of the net income in dividens and to
stock
holders. Marcketable securities are sold before funds are borrowed when when a cash shortage is
faced. Ignore
the intrest on any short-term borrowings. Intreat on the long-term debt is paid in March as are the
taxes and
dividens.

As of year-end, the marsh Corp balance sheet was as followed.

December 31,200X
Current Assets
Cash $30,000
Accounts receivable 320,000
inventory

237,000

Total assets

$587,800

Fixed assets
plant and equipment 1,000,000
Less: accumulated depreciation
Total assets

200,000

800,000
________
1,387,800

Liabilities and stock holders equity

Accounts payable
notes payable

$93,600
0

Long-term debt,8 percent

common stock
retained earnings

400,000

504,200
390,000

total liabilities and stockholders equity $1,387,800

Solution:Marsh Corporation
Forecasting with Seasonal Production

Projected Unit
Sales
+Desired Ending
Inventory (2
months supply)
Beginning
Inventory
Units to be
Produced

Dec.

Jan.

Feb.

Mar.

1,500,000

1,700,000

1,200,000

1,400,000

2,900,000

2,600,000

3,400,000

4,500,000

2,600,000

2,900,000

2,600,000

3,400,000

1,800,000

1,400,000

2,000,000

2,500,000

Monthly Cash Payments

Dec.

Jan.

Feb.

Mar.

Units to be
produced
1,800,000 1,400,000 2,000,000 2,500,000
Materials
(from previous
$93,600
$84,000
$120,000
month)
Labor ($20 per
thousand
$28,000
$40,000
$50,000
units)
Overhead ($10
per thousand
$14,000
$20,000
$25,000
units)
Selling & adm.
expense (20%
$52,700
$37,200
$43,400
of sales)
Interest
$8,000
Taxes (40% tax
rate)
$64,560*
Dividends
$48,420*
Total
Payments
$188,300 $181,200
$359,380
*See the pro forma income statement, which follows this material
later on, for the development of these values.

Marsh Corporation
Monthly Cash Receipts

Sales
Collections
(50% of
Previous
month)
Collections
(50% of 2
months
earlier)
Total
Collections

Nov.
Dec.
Jan.
Feb.
Mar.
$175,000 $232,500 $263,500 $186,000 $217,000

87,500 $116,250

131,750

93,000

87,500

116,250

131,750

$203,750 $248,000 $224,750

Monthly Cash Flow

Cash Receipts
Cash Payments
Net Cash Flow

January
$203,750
188,300
15,450

February
$248,000
181,200
66,800

March
$224,750
359,380
(134,630)

Marsh Corporation
Cash Budget

Net Cash Flow

Beginning Cash Balance
Cumulative Cash Balance
Loans and (Repayments)
Cumulative Loans
Marketable Securities
Cumulative Marketable
Securities
Ending Cash Balance

January
$15,450
30,000
$45,450
-0-020,450

February
$66,800
25,000
$91,800
-0-066,800

March
$(134,630)
25,000
($109,630)
47,380
47,380
(87,250)

20,450
$25,000

87,250
$25,000

-0$25,000

Marsh Corporation
Pro Forma Income Statement
Sales
Cost of Goods Sold
Gross Profit
Selling and Admin.
Expense
Interest Expense
Net Profit Before
Tax
Taxes
Net Profit After Tax
Less: Common
Dividends
Increase in
Retained Earnings

Jan.
$263,500
139,400
124,100

Feb.
$186,000
98,400
87,600

Mar.
$217,000
126,000
91,000

Total
$666,500
363,800
302,700

52,700
2,667

37,200
2,667

43,400
2,666

133,300
8,000

$ 68,733
27,493

$ 47,733
19,093

$ 44,934
17,974

$161,400
64,560

$ 41,240

$ 28,640

$ 26,960

$ 96,840
48,420
$ 48,420

Marsh Corporation
Cost of Goods Sold

Material...........
Labor...............
Overhead.........

Unit Cost per thousand

before January 1st
$52
20
10
$82

Unit cost per thousand

after January 1st
$60
20
10
$90

Ending inventory as of December 31 was 2,900,000, therefore, sales for

January and February had a cost of goods sold per thousand units of $82,
and March sales reflect the increased cost of $90 per thousand units
using FIFO inventory methods.
Pro Forma Balance Sheet (March)
Assets
Current Assets:
Cash.......................
Accounts Receivable
Inventory...............
Plant & Equip:
Net Plan
Total Assets

25,000
310,000
405,000

800,000
$1,540,000

Liabilities &
Stockholders' Equity
Current Liabilities:
Accounts Payable
Notes Payable
Long-Term Debt
Stockholders' Equity:
Common Stock
Retained Earnings,
Total Liabilities &
Stockholders' Equity

$ 150,000
47,380
400,000
504,200
438,420
$1,540,000

Explanation of Changes in the Balance Sheet:

Cash = ending cash balance from cash budget in March
Accounts receivable
$217,000
= all of March sales
93,000
plus 50% of Feb.
$310,000
sales
Inventory = ending inventory in March of 4,500,000 units at $90 per
thousand
Plant and equipment did not change since we did not include
depreciation.
RE = Old RE + (NI dividends)
= $390,000 + ($96,840 $48,240) = $438,420