You have just been hired as a management trainee by Cravat Sales Company, a nati
ID: 2471639 • 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 $28,000 cash. The company declares dividends of $9,000 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.
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
A schedule of expected cash collections from sales, by month and in total.
A schedule of expected cash disbursements for merchandise purchases, by month and in total.
A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
A budgeted balance sheet as of June 30.
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.
Explanation / Answer
Solution:
a.
*Interest = 43,000 x 1% x 3 = 1,290
Interest = 93000 x 1% x 2 = 1860
Budgets April May June Quarter Sales budget: Budgeted sales in units 38,000 53,000 64,000 155,000 Budgeted selling price $8 $8 $8 $8 Total sales $304,000 $424,000 $512,000 $1,240,000 b. Schedule of expected cash collections: February sales $62,000 $62,000 March sales 128,000 64,000 192,000 April sales 76,000 152,000 76,000 304,000 May sales 106,000 212,000 318,000 June sales 128,000 128,000 Total cash collections $266,000 $322,000 $416,000 $1,004,000 c. Budgeted purchases: Budgeted sales in units 38,000 53,000 64,000 155,000 Add budgeted ending inventory 47,700 57,600 44,100 149,400 Total needs 85,700 110,600 108,100 304,400 Less beginning inventory 34,200 47,700 57,600 139,500 Required purchases in units 51,500 62,900 50,500 164,900 Unit cost $5 $5 $5 $5 Required dollar purchases $257,500 $314,500 $252,500 $824,500 d. Budgeted cash disbursements for purchases: March purchases 93,500 93,500 April purchases 128,750 128,750 257,500 May purchases 157,250 157,250 314,500 June purchases 126,250 126,250 Total cash disbursements $222,250 $286,000 $283,500 $791,750 2. CRAVAT SALES COMPANY Cash Budget For the Three Months Ending June 30 April May June Quarter Cash balance, beginning $19,000 $10,550 $10,350 $19,000 Add receipts from customers 266,000 322,000 416,000 1,004,000 Total cash available 285,000 332,550 426,350 1,023,000 Less disbursements: Purchase of inventory 222,250 286,000 283,500 791,750 Sales commissions 38,000 53,000 64,000 155,000 Salaries and wages 24,200 24,200 24,200 72,600 Utilities 20,600 20,600 20,600 61,800 Miscellaneous 3,400 3,400 3,400 10,200 Dividends paid 9,000 9,000 Equipment purchases 28,000 28,000 Total disbursements 317,450 415,200 395,700 1,128,350 Excess (deficiency) of receipts over disbursements (32,450) (82,650) 30,650 (105,350) Financing: Borrowing 43,000 93,000 136,000 Repayments 0 0 (17,000) (17,000) Interest 0 0 (3,150)* (3,150) Total financing 43,000 93,000 (20,150) 115,850 Cash balance, ending $10,550 $10,350 $10,500 $10,500Related Questions
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