You have just been hired as a management trainee by Cravat Sales Company, a nati
ID: 2471292 • 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:
January (actual) 25,000
February (actual) 33,000
March (actual) 28,000
April 41,000
May 48,000
June 68,000
July 44,000
August 40,000
September 35,000
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.
The company’s monthly selling and administrative expenses are given below:
Variable:
Sales commissions $ 1 per tie
Fixed:
Wages and salaries $ 27,500
Utilities $ 18,200 Insurance $ 1,200
Depreciation $ 1,500
Miscellaneous $ 3,000
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 $22,000 cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:
Assets
Cash $ 10,000
Accounts receivable ($66,000 February sales; $168,000 March sales) 234,000
Inventory (36,900 units) 184,500
Prepaid insurance 14,400
Fixed assets, net of depreciation 150,450
Total assets $ 593,350
Liabilities and Stockholders’ Equity
Accounts payable $ 99,250
Dividends payable 12,000
Capital stock 300,000
Retained earnings 182,100
Total liabilities and stockholders’ equity $ 593,350
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 $150,000. 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.
Required:
1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
a. A sales budget by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.
Explanation / Answer
Solution:
1)
a) A sales budget by month and in total
Cravat Sales Company
Sales budget for the three-month period ending June 30
April
May
June
Total
Budgeted Sales in Units
41,000
48,000
68,000
157,000
Budgeted Selling Price Per Unit
$8
$8
$8
$8
Budgeted Sales in dollars
$328,000
$384,000
$544,000
$1,256,000
b) A schedule of expected cash collections from sales, by month and in total
Cravat Sales Company
Schedule of expected cash collections from sales for the three-month period ending June 30
April
May
June
Total
Budgeted Credit Sales in dollars
$328,000
$384,000
$544,000
$1,256,000
Collection Schedule
25% of sales are collected by month-end
$82,000
$96,000
$136,000
50% is collected in the following month of sales
$112,000
$164,000
$192,000
25% is collected in the second month following sale
$66,000
$56,000
$82,000
Total Cash Collection from Credit Sales
$260,000
$316,000
$410,000
$986,000
Working Note-1
Cravat Sales Company
Working note for schedule of expected cash collections from sales for the three-month period ending June 30
February
March
April
May
June
Budgeted Credit Sales in dollars
$264,000
$224,000
$328,000
$384,000
$544,000
Collection Schedule
25% of sales are collected by month-end
$66,000
$56,000
$82,000
$96,000
$136,000
50% is collected in the following month of sales
$132,000
$112,000
$164,000
$192,000
25% is collected in the second month following sale
$66,000
$56,000
$82,000
Total Cash Collection from Credit Sales
$66,000
$188,000
$260,000
$316,000
$410,000
c) A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
Cravat Sales Company
Merchandise purchases budget for the three-month period ending June 30
April
May
June
Total
Budgeted Sales in Units
41,000
48,000
68,000
157,000
Add: Ending Inventory (90% of next month sales unit)
43200
61200
39600
144,000
Less: Opening Inventory (Ending Inventory of Last Month)
-36900
-43200
-61200
-141,300
Purchase Requirement in Units
47,300
66,000
46,400
159,700
Per Ties Cost
$5
$5
$5
$5
Purchase Requirement in dollars
$236,500
$330,000
$232,000
$798,500
Working Note – 2
Cravat Sales Company
Working note for merchandise purchases budget for the three-month period ending June 30
March
April
May
June
July
Budgeted Sales in Units
28,000
41,000
48,000
68,000
44,000
Add: Ending Inventory (90% of next month sales unit)
36900
43200
61200
39600
Less: Opening Inventory (Ending Inventory of Last Month)
-36900
-43200
-61200
Purchase Requirement in Units
64,900
47,300
66,000
46,400
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total
Cravat Sales Company
Schedule of expected cash disbursements for merchandise purchases for the three-month period ending June 30
April
May
June
Total
Purchase Requirement in dollars
$236,500
$330,000
$232,000
$798,500
Schedule for Cash Disbursement
50% in the month of purchase
$118,250
$165,000
$116,000
50% in the following month
$99,250
$118,250
$165,000
Total Cash Disbursements for Merchandise Purchase
$217,500
$283,250
$281,000
$781,750
Working Note 3
Cravat Sales Company
Working for schedule of expected cash disbursements for merchandise purchases for the three-month period ending June 30
March
April
May
June
July
Budgeted Purchase Requirement in dollars
$198,500
$236,500
$330,000
$232,000
$798,500
Schedule for Cash Disbursement
50% in the month of purchase
$99,250
$118,250
$165,000
$116,000
$399,250
50% in the following month
$99,250
$118,250
$165,000
$116,000
Total Cash Disbursements for Merchandise Purchase
$99,250
$217,500
$283,250
$281,000
$515,250
Please ask separate questoin for rest requirements
Cravat Sales Company
Sales budget for the three-month period ending June 30
April
May
June
Total
Budgeted Sales in Units
41,000
48,000
68,000
157,000
Budgeted Selling Price Per Unit
$8
$8
$8
$8
Budgeted Sales in dollars
$328,000
$384,000
$544,000
$1,256,000
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