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 $9 each. Recent and forecasted sales in units are as follows: January (actual) 28,000 June 61,000 February (actual) 25,000 July 42,000 March (actual) 28,000 August 36,000 April 33,000 September 38,000 May 45,000 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 $ 31,800 Utilities $ 18,200 Insurance $ 1,000 Depreciation $ 1,500 Miscellaneous $ 3,200 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 $24,000 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 $ 13,000 Accounts receivable ($56,250 February sales; $189,000 March sales) 245,250 Inventory (29,700 units) 148,500 Prepaid insurance 12,000 Fixed assets, net of depreciation 153,900 Total assets $ 572,650 Liabilities and Stockholders’ Equity Accounts payable $ 81,250 Dividends payable 12,000 Capital stock 300,000 Retained earnings 179,400 Total liabilities and stockholders’ equity $ 572,650 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 $100,000. 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.

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

Explanation / Answer

Sales Budget April May June Qty           33,000        45,000       61,000 value 9 9 9 Total sale value         297,000      405,000     549,000 Cash Collection April May June Qty           33,000        45,000       61,000 value 9 9 9         297,000      405,000     549,000 Collected from Feb Sale           56,250 Collected from March Sale         126,000        63,000 Collected from April Sale           74,250      148,500       74,250 Collected from may Sale      101,250     202,500 Collected from June Sale     137,250         256,500      312,750     414,000 AR Collected from may Sale      101,250 Collected from June Sale     411,750 Cash Payment for Purchase and Invetory March April May June Sale 28000        33,000       45,000         61,000 Inventory Fom beg 25200        29,700       40,500         54,900 Inventory From End           29,700        40,500       54,900         37,800 Purchase Required           32,500        43,800       59,400         43,900 Purchase Cost per Unit 5 5 5 5 Purchase Amt.         162,500      219,000     297,000       219,500 AP           81,250      109,500     148,500       109,750 Total Cash payment      190,750     258,000       258,250 Cash Cash April May June Total Opening Cash           13,000        10,550       10,100         13,000 Cash Collected         256,500      312,750     414,000       983,250 Total Cash Collection         269,500      323,300     424,100       996,250 Cash Disbursement         190,750      258,000     258,250       707,000 Dividend Payment 12000         12,000 Land 24000         24,000 Sales Comminsion           33,000        45,000       61,000       139,000 Wages & Salaries           31,800        31,800       31,800         95,400 Utilities           18,200        18,200       18,200         54,600 Miscellaneous             3,200          3,200         3,200           9,600 Total Cash Disbursements         288,950      380,200     372,450    1,041,600 Cash Deficit          -19,450       -56,900       51,650       -45,350 Balance required Loan 30000        67,000         97,000 Interest on Loan         1,270           1,270 Loan Payment       40,000         40,000 balance           10,550        10,100       10,380         10,380 Income Statement April May June Consolidated Sale Qty           33,000        45,000       61,000       139,000 Sale price per Unit 9 9 9 9 Total Sales revenue         297,000      405,000     549,000    1,251,000 Cost of ties (Sales qty*5)         165,000      225,000     305,000       695,000 Sales Comminsion           33,000        45,000       61,000       139,000 Wages & Salaries           31,800        31,800       31,800         95,400 Utilities           18,200        18,200       18,200         54,600 Insurance             1,000          1,000         1,000           3,000 Depriciation             1,500          1,500         1,500           4,500 Miscellaneous             3,200          3,200         3,200           9,600 Interest on Loan         1,270           1,270 Profit before dividend           43,300        79,300     126,030       248,630 Less:Dividend Paid           12,000         12,000 Retained Earing Transferred to B/S           31,300        79,300     126,030       236,630 Balance Sheet Cash           10,380 AR         513,000 Inventory (37800*5)         189,000 Prepaid Insurane             9,000 Fixed Assets net of Dep         149,400 Land           24,000 Total Assets         894,780 Acounts Payable         109,750 Dividend payable           12,000 Capital Stock         300,000 Retained Earning         416,030 Loan           57,000 Total Liabilities         894,780

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