Connick Company sells its product for $22 per unit. Its actual and budgeted sale

Question

Connick Company sells its product for $22 per unit. Its actual and budgeted sales follow. Units Dollars January (actual) February (actual) March (budgeted) April (budgeted) May (budgeted) 18,000 $396,000 22,500 495,000 19,000 418,000 18,750 412,500 21,000 462,000 All sales are on credit. Recent experience shows that 40% of credit sales is collected in the month of the sale, 35% in the month after the sale, 23% in the second month after the sale, and 2% proves to be unco!- lectible. The product's purchase price is $12 per unit. Of purchases made in a month. 30% is paid in that month and the other 70% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 20% of the next month's unit sales plus a safety stock of 100 units. The January 31 and February 28 actual inventory levels are consistent with this policy. Selling and administrative ex penses for the year are $1,920,000 and are paid evenly throughout the year in cash. The company's mini mum cash balance for month-end is $50,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $50,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 12% interest rate. At February 28 the loan balance is $12,000, and the company's cash balance is $50,000 Required 1. Prepare a schedule that shows the computation of cash collections of its credit sales (accounts receiv- able) in each of the months of March and April. 2. Prepare a schedule showing the computations of budgeted ending inventories (units) for January February, March, and April. 3. Prepare the merchandise purchases budget for February, March, and April. Report calculations in units and then show the dollar amount of purchases for each month. 4. Prepare a schedule showing the computation of cash payments on product purchases for March and April. 5. Prepare a cash budget for March and April, including any loan activity and interest expense. Compute the loan balance at the end of each month

Explanation / Answer

January February March April May Sales Volume 18,000 22,500 19,000 18,750 21,000 Sales Value 3,96,000 4,95,000 4,18,000 4,12,500 4,62,000 (All on Credit) Schedule of Collections for: March April Collection of Jan Sales 4140 0 Collection of Feb Sales 173250 113850 Collection of Mar Sales 167200 146300 Collection of Apr Sales 0 165000 Total Collections 344590 425150 Schedule of Ending Inventories: January February March April May Sales Volume 18,000 22,500 19,000 18,750 21,000 Desired Closing Inventory: 20% of Next Month's Sales 4500 3800 3750 4200 Add: Safety Stock 100 100 100 100 Total Closing Inventory 4600 3900 3850 4300 Merchandise Purchase Budget: February March April Sales Volume During the Month 22500 19000 18750 Add: Desired Closing Inventory 3900 3850 4300 (Taken from above) Total Need 26400 22850 23050 Less: Opening Inventory 4600 3900 3850 Purchases 21800 18950 19200 Rate PU 12.00 Purchase Cost 2,61,600 2,27,400 2,30,400 Merchandise Purchase Payment Budget: March April For the Feb Purchases 1,83,120 0.00 For the Mar Purchases 68,220 1,59,180 For the Apr Purchases 0.00 69,120 Total 2,51,340 2,28,300 Annual S&A 1920000 Cash Budget: March April Monthly 160000 Opening Cash Balance 50,000 50,000 Add: Cash Collections 3,44,590 4,25,150 Total Cash Available 3,94,590 4,75,150 Less: Cash Payment for Purchases 2,51,340 2,28,300 Less: Cash Payment for Purchases 1,60,000 1,60,000 Excess(Deficit) -16,750 86,850 Borrowings: 66,750 Repayments 35,275 Interest Expense 1,575 Closing Cash Balance 50,000 50,000 Desired Closing Balance 50,000 50,000 Excess(Deficit) -16750 86850 Loan to be taken or Repayment 66,750 36,850 Excess Cash Taken Repaid Note: Due to Lack of Information about Interest Payment; it is assumed that Loan Interest is paid on Repayments Note: Also Assumed All Borrowing Takes place at beginning and repayments at end of the month Interest Working March April Loan Opening Balance 12000 78750 Loan Taken 66,750 0 Closing Loan Balance 78750 78750 Total Payment Interest 787.5 787.5 1575

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