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

ID: 2469874 • 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.

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:

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.

Create: A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

Create: A schedule of expected cash disbursements for merchandise purchases, by mont and in total.

Create: A cash budget. Show the budget in cash and in total.

Create: A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

Create: A budgeted balance sheet as of June 30.

Explanation / Answer

Ans 1 Budgeted Cash Receipt April May June Total Sales in units A 39000 53000 69000.0 161000 Sale Price 8 8 8 8 Sales in value 312000 424000 552000 1288000 25% in same month 78000 106000 138000 322000 March April May 50% in next month 144000 156000 212000 512000 216000 144000 72000 25% in second month 56000 72000 78000 206000 Total A 278000 334000 428000 1040000 Accounts Receivable May 424000*.25+June 552000*.75= 520000 Note 2 Cash Disbursement April May June Total July Finished Goods Sales S 39000 53000 69000 161000 49000 Closing Inventory 90% of next month sales S*.9 47700 62100 44100 900 Total Finised Googd 86700 115100 113100 161900 Less: Beginning Inventory 35100 47700 62100 800 Units to be produced 51600 67400 51000 170000 Purchase Price 5 5 5 5 Total Purchase price A 258000 337000 255000 850000 COGS= Units sold*5 195000 265000 345000 805000 Cash Disbursement 50% same month A 129000 168500 127500 425000 50% in next month 96750 129000 168500 394250 Total B 225750 297500 296000 819250 Accounts payable as on 30 June 255000*.5 127500 Cash Expenses Cash payment of purchases 225750 297500 296000 819250 Sales Commissions @ $1 *S 39000 53000 69000 161000 Wages & Salaries 31900 31900 31900 95700 Utilities 18500 18500 18500 55500 Miscelleneous expenses 3400 3400 3400 10200 Cash Expenses 318550 404300 418800 1141650 Divedend Paid 10000 10000 Land purchased 26000 26000 Total cash payment 328550 430300 418800 1177650 April May J June Total Beginning Cash balance 19000 $10,450 $10,150 19000 Ans 1 Budgeted Cash Receipt 278000 334000 428000 1040000 Less: Total cash payment 328550 430300 418800 1177650 Cash Balance before minimum cash balance ($31,550) -85850 19350 19350 Minimum Cash balance 10000 10000 10000 10000 Cash balnce Available ($41,550) ($95,850) $9,350 $9,350 Borrowed/Repaid 42000 96000 -6000 ($6,000) Interest Repaid 3% on $46000 -3180 ($3,180) 42000*3%+96000*2% Cash Balance $450 $150 $170 $170 Closing Cash Balance (Minimum Balance+cash balance) $10,450 $10,150 $10,170 $10,170 See the cash disbursement and cash payment schedule` Income Statement as on 3o June 2016 April May June Total Sales 312000 424000 552000 1288000 Less: variable Cost Cost of Good Sold 195000 265000 345000 805000 Sales Commissions 39000 53000 69000 161000 Contribution 78000 106000 138000 322000 Fixed Expenses Wages & Salaries 31900 31900 31900 95700 Utilities 18500 18500 18500 55500 Miscelleneous expenses 3400 3400 3400 10200 Insurance 1100 1100 1100 3300 Depreciation 1500 1500 1500 4500 Interest On Short Term Loan 420 1380 1380 3180 Net Operating Income 21180 48220 80220 149620 Statement of Retained earnings Opening balance 178500 Add: Net Income for the year 149620 Closing balance 328120 BalANCE Sheet as on 30 June Assets Cash 10170 Accounts Receivable 520000 Inventory (44100*5) 220500 Prepaid Insurance (13200-1100*3) 9900 Plant & Equipment 131550 Less: Accumulated Depreciation -4500 887620 Liabilities Accounts payable 127500 Short Term Loan payable 132000 Common Stock 300000 Retained earnings 328120 TotalLiabilities & Equity 887620

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