You have just been hired as a management trainee by Cravat Sales Company, a nati
ID: 2453822 • Letter: Y
Question
You have just been hired as a management trainee by Cravat Sales Company, a nationwide distributor of a designer’s silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favorable impression on the president and have assembled the information below.
The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each. Recent and forecasted sales in units are as follows:
The large buildup in sales before and during June is due to Father’s Day. Ending inventories are supposed to equal 90% of the next month’s sales in units. The ties cost the company $5 each.
Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 25% of a month’s sales are collected by month-end. An additional 50% is collected in the following month, and the remaining 25% is collected in the second month following sale. Bad debts have been negligible.
All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Land will be purchased during May for $32,000 cash. The company declares dividends of $18,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:
The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $160,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $10,000 in cash.
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each. Recent and forecasted sales in units are as follows:
Explanation / Answer
Particulars
April
May
June
Total
Cash receipts:
Opening cash balance
Sales receipts
Bank Loan
otal receipts
Cash disbursements:
Purchases
Sales commission
Wages & Salaries
Utilities
Miscellaneous
Land purchases
Dividends
Interest on loan
total payments
Ending cash balance
$11,000
254,000
65,000
---------------------
$330,000
--------------------
$213,250
37,000
25,600
21,900
3,500
nil
18000
nil
319,250
10,750
10,750
314,000
88,000
-------------------
$412,750
----------------------
$269,250
50,000
25,600
21,900
3,500
32,000
nil
650
$402,250
10,500
10,500
394,000
nil
-------------------
$404,500
---------------------
$266,000
60,000
25,600
21,900
3,500
nil
nil
1,530
$378,530
25,970
11,000
962,000
153,000
--------------------
$1,126,000
--------------------
748,500
147,000
76,800
65,700
10,500
32,000
18,000
2,180
$1,100,680
25,970
Working note 1:
Cash collections from sales in April
February sales collected in April (24,000×25%×$8) =$48,000
March sales collected in April (33,000×50%×$8) =132,000
April sales collected in April (37,000×25%×$8) = 74,000
-------------
Total cash collections in April $254,000
--------------
Cash collections in May
March sales collected in April (33,000×25%×$8) =$66,000
April sales collected in April (37,000×50%×$8) =148,000
May sales collected in April (50,000×25%×$8) = 100,000
-------------
Total cash collections in May $314,000
-------------
Cash collections in June
April sales collected in April (37,000×25%×$8) =$74,000
May sales collected in April (50,000×50%×$8) =200,000
June sales collected in April (60,000×25%×$8) =120,000
-------------
Total cash collections in June $394,000
--------------
1 (a). Sales Budget:
Particulars
April
May
June
Total
Expected sales in units
Selling price per unit
Total sales in $
37,000
×$8
$296,000
50,000
×$8
$400,000
60,000
×$8
$480,000
147,000
×$8
$1,176,000
Purchase Budget:
Particulars
April
May
June
Total
Current month requirement @10% of sales units
Next month requirement @90% of sales units
3700
45,000
48,700
5,000
54,000
59,000
6,000
41,400
47,400
14,700
140,400
155,100
Working note 2:
Payment to Purchases in April:
March purchases paid in April =$91,500
April purchases paid in April (48,700×50%×$5) =$121,750
----------------
Payment to Purchases in April: $213,250
-----------------
Payment to Purchases in May:
March purchases paid in April (48,700×50%×$5) =$121,750
April purchases paid in May (59,000×50%×$5) =$147,500
----------------
Payment to Purchases in may: $269,250
----------------
Payment to Purchases in June:
March purchases paid in May (59,000×50%×$5) =$147,500
April purchases paid in June (47,400×50%×$5) =$118,500
----------------
Payment to Purchases in June: $266,000
----------------
Particulars
April
May
June
Total
Cash receipts:
Opening cash balance
Sales receipts
Bank Loan
otal receipts
Cash disbursements:
Purchases
Sales commission
Wages & Salaries
Utilities
Miscellaneous
Land purchases
Dividends
Interest on loan
total payments
Ending cash balance
$11,000
254,000
65,000
---------------------
$330,000
--------------------
$213,250
37,000
25,600
21,900
3,500
nil
18000
nil
319,250
10,750
10,750
314,000
88,000
-------------------
$412,750
----------------------
$269,250
50,000
25,600
21,900
3,500
32,000
nil
650
$402,250
10,500
10,500
394,000
nil
-------------------
$404,500
---------------------
$266,000
60,000
25,600
21,900
3,500
nil
nil
1,530
$378,530
25,970
11,000
962,000
153,000
--------------------
$1,126,000
--------------------
748,500
147,000
76,800
65,700
10,500
32,000
18,000
2,180
$1,100,680
25,970
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