Harrison collects 20 % of its sales in the month of the sale, 50 % in the month following the sale, and the remaining 30 % two months following the...

Harrison collects 20 % of its sales in the month of the sale, 50 % in the month following the sale, and the remaining 30 % two months following the sale. During November and December of 2010, Harrison's sales were $220,000 and $175,000, respectively.

Harrison purchases raw materials two months in advance of its sales equal to 65 % of its final sales price. The supplier is paid one month after delivery. Thus, purchases for April sales are made in February and payment is made in March.

In addition, Harrison pays $10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments of $22,500 are made each quarter beginning in March. The company's cash balance as of December 31, 2010, was $22,000; a minimum balance of $20,000 must be maintained at all times to satisfy the firm's bank line of credit agreement. Harrison has arranged with its bank for short-term credit at an interest

rate of 12 percent per annum (1 percent per month) to be paid monthly. Borrowing to meet estimated monthly cash needs takes place at the end of the month, and interest is not paid until the end of the following month. Consequently, if the firm were to need to borrow $50,000 during the month of April, then it would pay $500 (= .01 × $50,000) in interest during May. Finally, Harrison follows a policy of repaying its outstanding short-term debt in any month in which its cash balance exceeds the minimum desired balance of $20,000.