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

ID: 2472658 • 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 $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 $90,000. 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.

Explanation / Answer

Ans 1 Budgeted Cash Receipt April May June Total Sales in units A 41000 51000 67000.0 159000 Sale Price 8 8 8 8 working Sales in value 328000 408000 536000 1272000 In In For February sales 66000 66000 March April May For March sales 148000 74000 222000 222000 148000 74000 For April sales 82000 164000 82000 328000 For may sales 102000 204000 306000 For June sales 134000 134000 Total A 296000 340000 420000 1056000 Accounts Receivable May 408000*.25+June 536000*.75= 504000 Note 2 Cash Disbursement April May June Total July Finished Goods Sales S 41000 51000 67000 159000 46000 Closing Inventory 90% of next month sales S*.9 45900 60300 41400 41400 Total Finised Googd 86900 111300 108400 200400 Less: Beginning Inventory 36900 45900 60300 36900 Units to be produced 50000 65400 48100 163500 Purchase Price 5 5 5 5 Total Purchase price A 250000 327000 240500 817500 COGS= Units sold*5 205000 255000 335000 795000 Cash Disbursement 50% same month A 125000 163500 120250 408750 50% in next month 101500 125000 163500 390000 Total B 226500 288500 283750 798750 Accounts payable as on 30 June 240500*.5 120250 Cash Expenses Cash payment of purchases 226500 288500 283750 798750 Sales Commissions @ $1 *S 41000 51000 67000 159000 Wages & Salaries 23500 23500 23500 70500 Utilities 15300 15300 15300 45900 Miscelleneous expenses 3100 3100 3100 9300 Cash Expenses 309400 381400 392650 1083450 Divedend Paid 9000 9000 Land purchased 26000 26000 Total cash payment 318400 407400 392650 1118450 April May J June Total Beginning Cash balance 19000 $8,600 $8,200 19000 Ans 1 Budgeted Cash Receipt 296000 340000 420000 1056000 Less: Total cash payment 318400 407400 392650 1118450 Cash Balance before minimum cash balance ($3,400) -58800 35550 -43450 Minimum Cash balance 10000 10000 10000 10000 Cash balnce Available ($13,400) ($68,800) $25,550 ($53,450) Borrowed/Repaid 12000 67000 ($26,000) $53,000 Interest Repaid 3% on $46000 -1700 ($1,700) Cash Balance ($1,400) ($1,800) ($2,150) ($2,150) Closing Cash Balance (Minimum Balance+cash balance) $8,600 $8,200 $7,850 $7,850 See the cash disbursement and cash payment schedule` Income Statement as on 3o June 2016 April May June Total Sales 328000 408000 536000 1272000 Less: variable Cost Cost of Good Sold 205000 255000 335000 795000 Sales Commissions 41000 51000 67000 159000 Contribution 82000 102000 134000 318000 Fixed Expenses Wages & Salaries 23500 23500 23500 70500 Utilities 15300 15300 15300 45900 Miscelleneous expenses 3100 3100 3100 9300 Insurance 1200 1200 1200 3600 Depreciation 1500 1500 1500 4500 Interest On Short Term Loan 120 790 790 1700 Net Operating Income 37280 56610 88610 182500 Statement of Retained earnings Opening balance 177900 Add: Net Income for the year 182500 Closing balance 360400 BalANCE Sheet as on 30 June Amount $ Assets Current assets Cash 7850 Accounts Receivable 504000 Inventory (41400*5) 207000 Prepaid Insurance (14400-1200*3) 10800 Total Current assets 729650 Fixed Assets Plant & Equipment (82500+26000) 108500 Less: Accumulated Depreciation -4500 Total Fixed Assets 104000 Total Assets 833650 Liabilities Current Liabilities Accounts payable 120250 Short Term Loan payable 53000 Total Current Liabilities 173250 Stockholder equity Common Stock 300000 Retained earnings 360400 Total Stockholder equity 660400 TotalLiabilities & Equity 833650

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