Hal Carrier, of Bulltuff Stock Trailers, Inc., has asked you for help. In the last four months, he has had several
checks written to suppliers that were refused by his bank because of nonsufficient funds. Now his main supplier, Alcoa Aluminum Supply Co., has cut off credit.
“We’re sorry, Hal,” Alcoa’s credit officer said, “but we simply cannot keep accepting your checks. Every
time one bounces, it costs us at least $1 00 combined in processing fees and our internal accounting. You
simply will have to pay cash or bring a cashier’s check for future purchases.”
Hal simply cannot understand why his checks keep bouncing. “We’ve plenty of sales,” he said, “and
our customers pay pretty much as agreed. Right now, I have only one customer who is as much as 60 days
past due. My accountant, Brill Yant, assures me that our cash balance never goes negative. So why are my
checks bouncing?”
To try to understand Hal’s problem and to advise him how to correct it, you have collected the following
information about Hal’s business:
- Cash sales are 1 0 ·percent of total sales.
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SBTV.1 2. Credit card sales are 1 0 percent of total sales and are collected the week following the sale. The
credit card provider deducts 2.5 percent of the gross amount of each credit card sale. (For example,
.—-:-,-:-.-;~~-:—r—…:o~n:::a::::.$1 00 sale, $2.50 is deducted.)
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- Sales on account are 80 percent of all sales. All credit sales are to dealers. T:;;er;::;m:;:s:ff;:;;or~di;;-ea::;!l;;:er:;;-s ~ar;:;::;e—;iL
“30-30-30,” that is, three equal payments made in each of the three months following the sale. Payments are considered late if they’re not received by the tenth of the month in which they are due.
~ eE - Direct materials, primarily aluminum, are 60 percent of the cost of building a trailer. Before credit was cut
off, Bulltuff paid 30 percent on delivery and the remainder in 30 days. Now it must pay cash on delivery. - Total cost of direct labor is 15 percent of the cost of building a trailer. Workers are paid each Friday
for work performed the previous week. Withholding and employment taxes are paid each Friday, also. - Variable costs combined (e.g., materials and labor) are 50 percent of gross sales. Fixed costs are not
allocated to the cost of trailers but are expensed evenly across the year. - All other costs combined are treated as fixed costs, and total $1 million per year.
- Bulltuff leases its building and equipment and has no depreciation.
- Sales for the year were originally projected to be $2,450,000. However, given the current growth in
sales, Hal now estimates that sales will be $5,000,000. - Sales for the first four months of the year have been:
January
February
March
April
$208,000
261,000
293,000
328,000 - What is causing Hal’s cash flow problems?
- Develop a plan to address the problems.
Sample Solution
