You have just been hired as a management trainee by Cravat Sales Company, a nati

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 $28,000 cash. The company declares dividends of $9,000 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 $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.

Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

A schedule of expected cash collections from sales, by month and in total.

A schedule of expected cash disbursements for merchandise purchases, by month and in total.

A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

A budgeted balance sheet as of June 30.

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.

Explanation / Answer

Sales Budget April May June Total Sales units 38000 53000 64000 155000 Price per unit 8 8 8 8 Sales Revenue 304000 424000 512000 1240000 Expected Cash Collection April May June Total Sales in Feb 62000 62000 sales in march 128000 64000 192000 Sales in April 76000 152000 76000 304000 Sales in May 106000 212000 318000 Sales in June 128000 128000 Total Cash collection 266000 322000 416000 1004000 A Mercendise Purchase budget in units and in dollors April May June Total Budgeted sales volume 38000 53000 64000 155000 Add: Ending Inventory 47700 57600 44100 44100 Total Needs 85700 110600 108100 199100 Less: Beginning Inventory 34200 47700 57600 34200 Estimated Production 51500 62900 50500 164900 Cost Per unit 5 5 5 5 Purchase Cost 257500 314500 252500 824500 Expected Cash disbursement for mercendise Purchase April May June Total Purchase during march 93500 93500 Purchase during April 128750 128750 257500 Purchase during May 157250 157250 314500 Purchase during June 126250 126250 Total Cash Payment for mercendise 222250 286000 283500 791750 Cash Budget April May June Total Cash Balance Opening 19000 10550 10350 19000 Cash Collect 266000 322000 416000 1004000 Total Cash available 285000 332550 426350 1023000 Less: Cash disbursement Mercendise Purchases 222250 286000 283500 791750 Sales Commission 38000 53000 64000 155000 Wages & Salaries 24200 24200 24200 72600 Utilities 20600 20600 20600 61800 Miscellaneous 3400 3400 3400 10200 Dividend Paid 9000 9000 Land Purchase 28000 28000 Total Disbursement 317450 415200 395700 1128350 Excess/Deficiency -32450 -82650 30650 -105350 Financing Borrowing 43000 93000 136000 Repayments 18000 18000 Interest 1790 1790 Total Financing 43000 93000 -19790 116210 Cash Balance Closing 10550 10350 10860 10860 Budgeted Income Statement Sales Revenue 1240000 Variable cost Cost of goods sold 775000 Commission 155000 Contribution Margin 310000 Fixed Costing Wages 72600 Utilities 61800 Insurance 4200 Depreciation 4500 Miscellaneous 10200 156700 Less: Interest -1790 Net Income 154910 Budgeted Balance sheet June 31th Assets Amount Liabilities Amount Cash 10860 Accounts Payable 126250 Accounts Receivable Dividend Payable 9000 Inventory 44100 Loan Payable 118000 Prepaid Insurance Capital stock 300000 Fixed Assets,net of Depreciation 146200 Retained Earning 335910

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