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

ID: 2743127 • 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

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

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 $25,000 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:

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.

Explanation / Answer

Answer to Part b) Cravat Sales Company Schedule of Expected Cash Collections April May June Quarter February Sales 50000 50000 March Sales 132000 66000 198000 April sales 88000 176000 88000 352000 May Sales 102000 204000 306000 June Sales 124000 124000 Total Cash Collection 270000 344000 416000 1030000 Answer to Part c) Cravat Sales Company Merchandise Purchase Budget April May June Quarter Budgeted Sales in Units 44000 51000 62000 157000 Add: Budgeted ending inventory 45900 55800 44100 145800 Total Needs 89900 106800 106100 302800 Deduct : Beginning Inventory 39600 45900 55800 141300 Required Unit Purchases 50300 60900 50300 161500 Unit Cost 5 5 5 5 Required Dollar Purchases 251500 304500 251500 807500 Answer to Part d) Cravat Sales Company Budgeted Cash Disbursement for Merchandise Purchases April May June Quarter March Purchases 107250 107250 April Purchases 125750 125750 251500 May Purchases 152250 152250 304500 June Purchases 125750 125750 Total Cash Payments 233000 278000 278000 789000

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