You have just been contracted as a budget consultant by LBJ Company, a distribut
ID: 2415969 • Letter: Y
Question
You have just been contracted as a budget consultant by LBJ Company, a distributor of bracelets to various retail outlets across the country. The company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.
You have decided to prepare a cash budget for the upcoming fourth quarter in order to show management the benefits that can be gained from proper cash planning. You have worked with accounting and other areas to gather the information assembled below.
The company sells many styles of bracelets, but all are sold for the same $10 price. Actual sales of bracelets for the last three months and budgeted sales for the next six months follow:
July (actual)
20,000
August (actual)
26,000
September (actual)
40,000
October (budget)
70,000
November (budget)
110,000
December (budget)
60,000
January (budget)
30,000
February (budget)
28,000
March (budget)
25,000
The concentration of sales in the fourth quarter is due to the Christmas holiday. Sufficient inventory should be on hand at the end of each month to supply 40% of the bracelets sold in the following month.
Suppliers are paid $4 for each bracelet. Fifty-percent of a month's purchases is paid for in the month of purchase; the other 50% is paid for in the following month. All sales are on credit with no discounts. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Variable expenses:
Sales commissions 4% of sales
Fixed expenses:
Advertising $220,000
Rent $20,000
Salaries $110,000
Utilities $10,000
Insurance $5,000
Depreciation $18,000
Insurance is paid on an annual basis, in January of each year.
The company plans to purchase $22,000 in new equipment during October and $50,000 in new equipment during November; both purchases will be for cash. The company declares dividends of $20,000 each quarter, payable in the first month of the following quarter.
Other relevant data is given below:
Cash balance as of September 30 $74,000
Inventory balance as of September 30 $112,000
Merchandise purchases for September $200,000
The company maintains a minimum cash balance of at least $50,000 at the end of each month. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow the exact amount needed at the beginning of each month. 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 will pay the bank all of the accrued interest on the loan and as much of the loan as possible while still retaining at least $50,000 in cash.
Required:
Prepare a cash budget for the three-month period ending December 31. Include the following detailed budgets:
1. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.
July (actual)
20,000
August (actual)
26,000
September (actual)
40,000
October (budget)
70,000
November (budget)
110,000
December (budget)
60,000
January (budget)
30,000
February (budget)
28,000
March (budget)
25,000
Explanation / Answer
a) Sales Budget October November December Total Budgeted sales unit 70000 110000 60000 240000 Selling Price 10 10 10 Budgeted Sales Value 700000 1100000 600000 2400000 b) Schedule of expected cash collections October November December Total Current Month sales - 20% 140000 220000 120000 480000 Following months collection - 70% 280000 490000 770000 1540000 second months collection - 10% 26000 40000 70000 136000 Total monthly collection 446000 750000 960000 2156000 c) Merchandise purchase budget October November December Total Number of units required for monthly sales 70000 110000 60000 240000 Closing inventory desired - 40% of following month 44000 24000 12000 80000 Total units required 114000 134000 72000 320000 Less : opening inventory 16000 44000 24000 84000 Merchandise purchased ( units) 98000 90000 48000 236000 Price per unit 4 4 4 Merchandise purchased ( $) 392000 360000 192000 944000 d) Schedule of cash disbursements October November December Total Current months purchase - 50% 196000 180000 96000 472000 Previous months purchase - 50% 100000 196000 180000 476000 Total cash disbursements 296000 376000 276000 948000 2) Cash Budget for 4th Quarter October November December Total Opening cash balance 74000 50000 50000 174000 Cash received from sales 446000 750000 960000 2156000 Tital cash received 520000 800000 1010000 2330000 Less : Merchandise Purchased 296000 376000 276000 948000 Variable expenses - 4% of sales 28000 44000 24000 96000 Fixed Expenses Advertising 220000 220000 220000 660000 Rent 20000 20000 20000 60000 Salaries 110000 110000 110000 330000 Utilities 10000 10000 10000 30000 Equioment Purchase 22000 50000 72000 Fdividend paid for previous quarter 20000 20000 Total cash disbursement 726000 830000 660000 2216000 Closing balance -206000 -30000 350000 114000 Minimum cash required 50000 50000 50000 Bank borrowing 256000 80000 0 ` Revised cash budget Cash Budget for 4th Quarter October November December Total Opening cash balance 74000 50000 50000 174000 Cash received from sales 446000 750000 960000 2156000 Bank Borrowing 256000 80000 0 336000 Tital cash received 776000 880000 1010000 2666000 Less : Merchandise Purchased 296000 376000 276000 948000 Variable expenses - 4% of sales 28000 44000 24000 96000 Fixed Expenses Advertising 220000 220000 220000 660000 Rent 20000 20000 20000 60000 Salaries 110000 110000 110000 330000 Utilities 10000 10000 10000 30000 Equioment Purchase 22000 50000 72000 Fdividend paid for previous quarter 20000 20000 Total cash disbursement 726000 830000 660000 2216000 Closing balance 50000 50000 350000 450000 Loan Repayment : Interest @ 1% pm borrowing in October - interest for 3 months = 256000 *3% = 7680 borrowing in November - interest for 2 months = 80000 *2% = 1600 Total interest payable 9280 Cash available at emfd of the quarter 350000 Minimum cash required 50000 Balance available to pay off loan ( with interest) 300000 Interest paid 9280 Balance principle paid 290720 Final Cash Budget Cash Budget for 4th Quarter October November December Total Opening cash balance 74000 50000 50000 174000 Cash received from sales 446000 750000 960000 2156000 Bank Borrowing 256000 80000 0 336000 Total cash received 776000 880000 1010000 2666000 Less : Merchandise Purchased 296000 376000 276000 948000 Variable expenses - 4% of sales 28000 44000 24000 96000 Fixed Expenses Advertising 220000 220000 220000 660000 Rent 20000 20000 20000 60000 Salaries 110000 110000 110000 330000 Utilities 10000 10000 10000 30000 Equioment Purchase 22000 50000 72000 dividend paid for previous quarter 20000 20000 Loan paid with interest 300000 300000 Total cash disbursement 726000 830000 960000 2516000 Closing balance 50000 50000 50000 150000
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