The Sunflower, Inc makes and sells tasty hamburgers for $8 per unit with a unit variable cost of $6. All sales are for cash and the variable costs are paid immediately. The company has budgeted the following data for November: Sales 20000 units
Cash, Beginning Balance $34,000
Selling and administratie(of which depreciation $5,000) $53,000
If necessary, the company will borrow cash from a bank on the first day of November. Assume that the borrowing can be made in any (exact) amount, but bears interest at 2% per month. The November interest will be paid in cash during November. What is the closest amount of cash that must be borrowed on November 1 to cover all cash disbursements and to obtain the desired November 30 cash balance?

Amount to be borrowed is around $7,140

Explanation:

All the sales are cash sales

Total number of units produced and sold 20,000 units

Selling price is $8

Cash receipt on account on sales is 20,000 * $8 = $160,000

Variable cost per unit is $6

Total number of units produced and sold = 20,000 unit

Cash to be paid is $20,000 * $8 = $120,000

Calculation of Ending cash balance without considering Loan amount

Particulars                        Amount$       Amount$

Beginning Cash                                    34,000

Cash receipts on sales                         160,000

Total cash available                              194,000

Less: Cash disbursement                      120,000

Variable cost

Selling and administrative    53,000

Less: Depreciation                 -5,000      48,000

Ending cash balance                               26,000

Ending cash balance without considering loan amount is $26,000

Required cash balance is $33,000

Rate of interest of 2% per month

Amount to be taken as loan is: (Required cash balance - Available cash balance)* 102%

= ($33,000 - $26,000) * 102%

= $7,140

Amount to be borrowed is around $7,140