You have just been hired as a management trainee by Cravat Sales Company, a nati
ID: 2451710 • 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:
January (actual) 28,000
February (actual) 28,000
March (actual) 36,000
April 39,000 May 53,000
June 69,000
July 49,000
August 40,000
September 35,000
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 $ 31,900
Utilities $ 18,500
Insurance $ 1,100
Depreciation $ 1,500
Miscellaneous $ 3,400
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 $26,000 cash. The company declares dividends of $10,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:
Assets
Cash $ 19,000
Accounts receivable ($56,000 February sales; $216,000 March sales) 272,000
Inventory (35,100 units) 175,500
Prepaid insurance 13,200
Fixed assets, net of depreciation 105,550
Total assets $ 585,250
Liabilities and Stockholders’ Equity
Accounts payable $ 96,750
Dividends payable 10,000
Capital stock 300,000
Retained earnings 178,500
Total liabilities and stockholders’ equity $ 585,250
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 $140,000. 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: 1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
a. A sales budget by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. 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. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.
Explanation / Answer
Cravat Sales Company Sales Budget Particulars April May June Total Expected Sales In Units 39000 53000 69000 161000 Selling price per Unit $8 $8 $8 $8 Total Budgeted Sales $312,000 $424,000 $552,000 $1,288,000 Schedule of Expected Sales Collection Particulars April May June Total Current Month sales 25% $78,000 $106,000 $138,000 $322,000 Prior month's sales 50% $144,000 $156,000 $212,000 $512,000 Two month's prior sales 25% $56,000 $72,000 $78,000 $975,000 Total cash collections $278,000 $334,000 $428,000 $1,809,000 Merchandise Purchase Budget Particulars April May June Total Budgeted Sales in Units 39000 53000 69000 161000 Add: Desired Ending Inventory 47700 62100 44100 153900 Total Needs 86700 115100 113100 314900 Less: Opening Inventory of Tie 35100 47700 62100 144900 Required Purchase in Units 51600 67400 51000 170000 Purchase Price Per Tie $5 $5 $5 $5 Total Purchase Cost $258,000 $337,000 $255,000 $850,000 Schedule of expected cash disbursements for merchandise purchase Particulars April May June Total Total Purchase Cost $258,000 $337,000 $255,000 $850,000 Current Month Purchases 50% 129000 168500 127500 425000 Prior month's purchases 50% 96750 129000 168500 394250 Total Expected Cash Disbursement 225750 297500 296000 819250 Cash Budget Particulars April May June Total Opening cash Balance $19,000 $28,450 $35,550 $19,000 Add: receipts Collection from Customers $278,000 $334,000 $428,000 $1,040,000 Total Cash available $297,000 $362,450 $463,550 $1,059,000 Less: Disbursements Cash Disbursement - Accounts Payable 225,750 297,500 296,000 $819,250 Sales Commission $39,000 $53,000 $69,000 $161,000 Fixed Expenses Wages & Salaries $31,900 $31,900 $31,900 $95,700 Utilities $18,500 $18,500 $18,500 $55,500 Miscellaneous $3,400 $3,400 $3,400 $10,200 Dividends Paid $10,000 $0 0 $10,000 Purchase of Land $0 $2,600 $0 $2,600 Total Disbursement 328550 406900 418800 $1,154,250 Cash Balance Closing ($31,550) ($44,450) $44,750 ($95,250) Add: Bank Loan $60,000 $80,000 $0 $140,000 Less: Payment of Bank loan $0 $0 ($31,000) ($31,000) Less: Payment of Bank loan - Interest ($3,400) ($3,400) Net Cash Balance Closing $28,450 $35,550 $10,350 $10,350 Budgeted Income Statement For the Period April-1 to June-30 Particulars Amount Sales - 161000 Units @$8 per Tie $1,288,000 Less: Variable Costs Purchase of Ties - 161000 Units @ $5 per tie $805,000 Sales Comm. - 161000 Units @ $1 $161,000 Total Variable Costs $966,000 Contribution $322,000 Less: Fixed Costs Wages & Salaries $95,700 Utilities $55,500 Miscellaneous $10,200 Depreciation $4,500 Insurance $3,300 Total Fixed Cost $169,200 Net Income before Interest $152,800 Interest on bank Loan April $600 May $1,400 June $1,400 Total Interest Cost $3,400 Net Income After Interest $149,400 Budgeted Balance Sheet For the Period Ended June-30 Equity & Liabilities Amount 1. Shareholder's Funds Capital Stock $300,000 Retained Earnings Op. Balance $178,500 Add: Net Profit $149,400 Less: Dividend ($30,000) $297,900 2. Non Current Liabilities 3. Current Liabilities Bank Loan - 12% $109,000 Dividends Payable $30,000 Accounts Payable $127,500 $266,500 Total $864,400 Assets 1. Non Current Assets Fixed Assets $105,550 Add: Land purchased $2,600 Less: Accumulated Dep - Furnitures & Equipments ($4,500) $110,050 2. Current Assets Accounts Receivables $423,600 Prepaid Insurance $9,900 Inventory -Tie - 62100 Units @ $5 $310,500 Cash $10,350 $754,350 Total 864400
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