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

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 $9 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 $21,000 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 $100,000. 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 sales budget by month and in total.

A schedule of expected cash collections from sales, by month and in total.

A merchandise purchases budget in units and in dollars. Show the budget 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.)

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

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

Answer 1. a Cravat Sales Company Sales Budget April May June Total Budgeted Units Sales                32,000                45,000                 65,000              142,000 SP Per Unit                           9                           9                           9                           9 Total Budgeted Sales in $              288,000              405,000              585,000          1,278,000 Feb. Actual Sales              225,000 March Actual Sales              243,000 Answer 1. b Schedule of Expected Cash Collections from Sales April May June Total Collection from Accounts Receivables AR - Feb Sales                56,250                56,250 AR- March Sales              121,500                60,750              182,250 April Sales collections                72,000              144,000                 72,000              288,000 May Sales collections              101,250              202,500              303,750 June Sales collections                         -                            -                146,250              146,250 Total cash Collections              249,750              306,000              420,750              976,500 Answer 1.c Merchandise Purchase Budget April May June Total Budgeted Units Sales                32,000                45,000                 65,000              142,000 Add: Closing Inventory in units (90%)                40,500                58,500                 38,700              137,700 Total Needs                72,500              103,500              103,700              279,700 Less: opening Inventory in uints              (28,800)              (40,500)              (58,500)            (127,800) Required Purchases in Units                43,700                63,000                 45,200              151,900 Unit Costs                     5.00                     5.00                     5.00                     5.00 Total Purchases in $              218,500              315,000              226,000              759,500 Answer 1. d Schedule of Cash payments to Suppliers April May June Total Cash Payment Accounts Payable - March 78750 78750 April Purchases 109250 109250 218500 May Purchases 157500 157500 315000 June Purchases              113,000 113000 Total Cash Payment to Suppliers              188,000              266,750              270,500              725,250 Cash budget April May June Total Opening cash Balance                11,000                10,950                 10,400                11,000 Add: receipts Collection from Customers              249,750              306,000              420,750              976,500 Total Cash available from operations              260,750              316,950              431,150              987,500 Less: Cash Disbursements Merchandise Purchases           (188,000)            (266,750)            (270,500)            (725,250) Sales Comm. ($1 per Tie)              (32,000)              (45,000)              (65,000)            (142,000) Wage & Salaries              (25,200)              (25,200)              (25,200)              (75,600) Utilities              (16,000)              (16,000)              (16,000)              (48,000) Miscellaneous                (3,600)                (3,600)                 (3,600)              (10,800) Dividends Paid              (10,000)                          -                            -                (10,000) Total Disbursement           (274,800)            (356,550)            (380,300)        (1,011,650) Investments (Assets Using Cash) Short term - interest bearing                         -                            -                            -                            -   Land Purchased              (21,000)                          -                (21,000) Excess cash avail over disburse & Invest.              (14,050)              (60,600)                 50,850              (45,150) Financing: issue more Stock                         -                            -                            -                            -   Borrowings                25,000                71,000                96,000 Repayments                          -                (38,000)              (38,000) Interest                          -                   (2,170)                (2,170) Total Financing                25,000                71,000              (40,170)                55,830 Net Cash Balance Closing                10,950                10,400                 10,680                10,680 Contribution Margin Income Statement For the Qtr Ending June 30 Sales          1,278,000 Less: Variable Cost Cost of Goods Sold (142000 Units X $5)              710,000 Sales Comm. - $1 per Tie              142,000              852,000 Contribution              426,000 Less: Fixed Cost Wage & Salaries                75,600 Utilities                48,000 Miscellaneous                10,800 Insurance                  3,900 Dep.                  4,500              142,800 Operating Profit              283,200 Less: Interest Expenses                   2,170 Net Income              281,030 Balance Sheet As on June 30 Assets Current Assets Cash                10,680 Accounts receivables              540,000 Prepaid Insurance                11,700 Inventory              193,500              755,880 Fixed Assets (Net of Dep.              177,350 Total Assets              933,230 Liabilities Accounts Payable              113,000 Dividends Payable                10,000 Bank loan                58,000 Total liabilities              181,000 Shareholders's Equity Common Stock              300,000 Retained Earnings              452,230 Total Stockholders equity              752,230 Total liabilities & Stockholders' Equity              933,230                          -   Schedule of Retained Earnings As on June 30 Opening Balance              181,200 Add: net income              281,030 Less: Dividend declared              (10,000) Closing Balance              452,230

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.