You have just been hired as a management trainee by Cravat Sales Company, a nati
ID: 2471867 • 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:
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
Ans 1 Budgeted Cash Receipt April May June Total Sales in units A 41000 48000 68000.0 157000 Sale Price 8 8 8 8 working Sales in value 328000 384000 544000 1256000 In In For February sales 66000 66000 March April May For March sales 112000 56000 168000 168000 112000 56000 For April sales 82000 164000 82000 328000 For may sales 96000 192000 288000 For June sales 136000 136000 Total A 260000 316000 410000 986000 Accounts Receivable May 384000*.25+June 544000*.75= 504000 Note 2 Cash Disbursement April May June Total July Finished Goods Sales S 41000 48000 68000 157000 44000 Closing Inventory 90% of next month sales S*.9 43200 61200 39600 39600 Total Finised Googd 84200 109200 107600 196600 Less: Beginning Inventory 36900 43200 61200 36900 Units to be produced 47300 66000 46400 159700 Purchase Price 5 5 5 5 Total Purchase price A 236500 330000 232000 798500 COGS= Units sold*5 205000 240000 340000 785000 Cash Disbursement 50% same month A 118250 165000 116000 399250 50% in next month 99250 118250 165000 382500 Total B 217500 283250 281000 781750 Accounts payable as on 30 June 281000*.5 116000 Cash Expenses Cash payment of purchases 217500 283250 281000 781750 Sales Commissions @ $1 *S 41000 48000 68000 157000 Wages & Salaries 27500 27500 27500 82500 Utilities 18200 18200 18200 54600 Miscelleneous expenses 3000 3000 3000 9000 Cash Expenses 307200 379950 397700 1084850 Divedend Paid 12000 12000 Land purchased 22000 22000 Total cash payment 319200 401950 397700 1118850 April May J June Total Beginning Cash balance 10000 $10,800 $10,850 10000 Ans 1 Budgeted Cash Receipt 260000 316000 410000 986000 Less: Total cash payment 319200 401950 397700 1118850 Cash Balance before minimum cash balance ($49,200) -75150 23150 -122850 Minimum Cash balance 10000 10000 10000 10000 Cash balnce Available ($59,200) ($85,150) $13,150 ($132,850) Borrowed/Repaid 60000 86000 -9000 $137,000 Interest Repaid 3% on $46000 -3520 ($3,520) 60000*3%+86000*2% Cash Balance $800 $850 $630 $630 Closing Cash Balance (Minimum Balance+cash balance) $10,800 $10,850 $10,630 $10,630 See the cash disbursement and cash payment schedule` Income Statement as on 3o June 2016 April May June Total Sales 328000 384000 544000 1256000 Less: variable Cost Cost of Good Sold 205000 240000 340000 785000 Sales Commissions 41000 48000 68000 157000 Contribution 82000 96000 136000 314000 Fixed Expenses Wages & Salaries 27500 27500 27500 82500 Utilities 18200 18200 18200 54600 Miscelleneous expenses 3000 3000 3000 9000 Insurance 1200 1200 1200 3600 Depreciation 1500 1500 1500 4500 Interest On Short Term Loan 600 1460 1460 3520 Net Operating Income 30000 43140 83140 156280 Statement of Retained earnings Opening balance 182100 Add: Net Income for the year 156280 Closing balance 338380 BalANCE Sheet as on 30 June Amount $ Assets Current assets Cash 10630 Accounts Receivable 504000 Inventory (39600*5) 198000 Prepaid Insurance (14400-1200*3) 10800 Total Current assets 723430 Fixed Assets Plant & Equipment (150450+22000) 172450 Less: Accumulated Depreciation -4500 Total Fixed Assets 167950 Total Assets 891380 Liabilities Current Liabilities Accounts payable 116000 Short Term Loan payable 137000 Total Current Liabilities 253000 Stockholder equity Common Stock 300000 Retained earnings 338380 Total Stockholder equity 638380 TotalLiabilities & Equity 891380
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