Question

Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will increase by 18,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale. Cash collections for the third quarter are budgeted ata) $6,156,000
b) $5,319,000
c) $3,051,000
d) $4,428,000.

Answer 1

Answer:

The answer is b) $5,319,000.

Explanation:

We have cash collection in third quarter will include:

+ 40% of sales in third quarter which is made in cash;

+ 70% of the remaining 60% of credit sales in third quarter which is collected within the quarter;

+ The remaining 30% of 60% credit sales in second quarter which is collected in third quarter.

We also have:

Sales in second quarter (units) = 180,000 + 18,000 = 198,000 units => Sales revenue = 198,000 x 25 = $4,950,000 => Cash collection in third quarter = 30% x (60%x 4,950,000) = $891,000;

Sales in third quarter (units) = 198,000 + 18,000 = 216,000 units => Sales revenue = 216,000 x 25 = 5,400,000 => Cash collection in third quarter = 0.4 x 5,400,000 + 0.7 x (0.6 x 5,400,000) = $4,428,000

=> Total cash collection in third quarter = 891,000 + 4,428,000 = $5,319,000  

Answer 2

Answer:

b) $5,319,000

Explanation:

If sales increases by 18,000 units each quarter over the year and Dolce Co. estimates its sales at 180,000 units in the first quarter

First quarter sales = 180,000 units

Second quarter sales = 180,000 + 18,000 = 198,000 units

Third quarter sales = 198,000 + 18,000 = 216,000 units

If 40% of the sales are for cash then automatically, 60% of the sales are on account.

Furthermore, if 70% of the credit customers (42% of sales) pay within the quarter, it means that 30% of the credit customers (18% of sales) will not pay until the quarter following.

As such, Cash collections for the third quarter will be made of 40% sales in that quarter, 42% of the sales in that quarter and 18% of the sales in the second quarter.

Cash collections for the third quarter

= (40% × 216,000 × $25) + (42% × 216,000 × $25) + (18% × 198,000 × $25)

= $5,319,000