Question

The Denver Corporation has forecast the following sales for the first seven months of the year:

January	\(15,000	May	\)15,000
February	17,000	June	21,000
March	19,000	July	23,000
April	25,000

Monthly material purchases are set equal to 40 percent of forecast sales for the next month. Of the total material costs, 50 percent are paid in the month of purchase and 50 percent in the following month. Labor costs will run \(4,500 per month, and fixed overhead is \)4,500 per month. Interest payments on the debt will be $3,500 for both March and June. Finally, the Denver salesforce will receive a 3.00 percent commission on total sales for the first six months of the year, to be paid on June 30.

Prepare a monthly summary of cash payments for the six-month period from January through June. (Note: Compute prior December purchases to help get total material payments for January.)

Short answer

Schedule of cash payments

Months	Payment for material purchases (A)	Payment for labor cost (B)	Payment for fixed overheads (C )	Payment for interest (D)	Payments for sales commission (E )	Total payments (A+B+C+D+E)
January	6,400	4,500	4,500			15,400
February	7,200	4,500	4,500			16,200
March	8,800	4,500	4,500	3,500		21,300
April	8,000	4,500	4,500			17,000
May	7,200	4,500	4,500			16,200
June	8,800	4,500	4,500	3,500	3,360	24,660

Step-by-step solution

Material purchases schedule

Months	Sales	Purchases @40% of sales for the next month
December		6,000
January	15,000	6,800
February	17,000	7,600
March	19,000	10,000
April	25,000	6,000
May	15,000	8,400
June	21,000	9,200
July	23,000

Material cost payment schedule

Months	Material purchases	50% paid in same month	50% paid after one month	Total payment
December	6,000	3,000		3,000
January	6,800	3,400	3,000	6,400
February	7,600	3,800	3,400	7,200
March	10,000	5,000	3,800	8,800
April	6,000	3,000	5,000	8,000
May	8,400	4,200	3,000	7,200
June	9,200	4,600	4,200	8,800

Sales commission

$\begin{array}{rcl}\mathrm{Sales}\mathrm{commission}& =& \mathrm{Total}\mathrm{sales}\mathrm{for}6\mathrm{months}\times \%\mathrm{sales}\mathrm{of}\mathrm{commission}\\ & & \mathrm{=}\left(\$15,000+\$17,000+\$19,000+\$25,000+\$15,000+\$21,000\right)\times 3\%\\ & =& \$3,360\end{array}$