you have just been hired as a management trainee by Cravat Sales Company, a nati
ID: 2473735 • 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 $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. Required:
A cash budget. Show the budget by month and in total.
A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
A budgeted balance sheet as of June 30.
2. A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.) Cravat Sales Company Cash Budget For the Three Months Ending June 30 April May June Quarter Cash balance, beginning Add receipts from customer:s Total cash available Less disbursements 0 0 0 Purchase of inventory Sales commissions Salaries and wages Utilities Miscellaneous Dividends paid Land purchases 0 0 0 0 Total disbursements Excess (deficiency) of receipts over disbursements Financing: 0 Borrowings Repayments Interest 0 Total financing Cash balance, ending 0Explanation / Answer
Sales Budget April May June Total Sales units 33000 45000 61000 139000 Price per unit 9 9 9 9 Sales Revenue 297000 405000 549000 1251000 Expected Cash Collection April May June Total Sales in Feb 56250 56250 sales in march 126000 64000 190000 Sales in April 74250 148500 74250 297000 Sales in May 101250 202500 303750 Sales in June 137250 137250 Total Cash collection 256500 313750 414000 984250 A Mercendise Purchase budget in units and in dollors April May June Total Budgeted sales volume 33000 45000 61000 139000 Add: Ending Inventory 40500 54900 37800 37800 Total Needs 73500 99900 98800 176800 Less: Beginning Inventory 29700 40500 54900 29700 Estimated Production 43800 59400 43900 147100 Cost Per unit 5 5 5 5 Purchase Cost 219000 297000 219500 735500 Expected Cash disbursement for mercendise Purchase April May June Total Purchase during march 81250 81250 Purchase during April 109500 109500 219000 Purchase during May 148500 148500 297000 Purchase during June 109750 109750 Total Cash Payment for mercendise 190750 258000 258250 707000 Cash Budget April May June Total Cash Balance Opening 13000 10550 10100 19000 Cash Collect 256500 313750 414000 984250 Total Cash available 269500 324300 424100 1003250 Less: Cash disbursement Mercendise Purchases 190750 258000 258250 707000 Sales Commission 33000 45000 61000 139000 Wages & Salaries 31800 31800 31800 95400 Utilities 18200 18200 18200 54600 Miscellaneous 3200 3200 3200 9600 Dividend Paid 12000 12000 Land Purchase 24000 24000 Total Disbursement 288950 380200 372450 1041600 Excess/Deficiency -19450 -55900 51650 -23700 Financing Borrowing 30000 66000 96000 Repayments -42000 -42000 Interest -2220 -2220 Total Financing 30000 66000 -44220 51780 Cash Balance Closing 10550 10100 7430 28080 Budgeted Income Statement Sales Revenue 1251000 Variable cost Cost of goods sold 695000 Commission 139000 Contribution Margin 417000 Fixed Costing Wages 95400 Utilities 54600 Insurance 3000 Depreciation 4500 Miscellaneous 9600 249900 Less: Interest -2220 Net Income 247680 Budgeted Balance sheet June 31th Assets Amount Liabilities Amount Cash 10520 Accounts Payable 109750 Accounts Receivable 513000 Dividend Payable 12000 Inventory 189000 Loan Payable 54000 Prepaid Insurance 9000 Capital stock 300000 Fixed Assets,net of Depreciation 173400 Retained Earning 415080 894920 890830
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