You have just been hired as a management trainee by Cravat Sales Company, a
nationwide distributor of a designers 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) . . . . . . . . . 20,000
February (actual) . . . . . . . . 24,000
March (actual) . . . . . . . . . . 28,000
April . . . . . . . . . . . . . . . . . . 35,000
May . . . . . . . . . . . . . . . . . . 45,000
June . . . . . . . . . . . . . . . . . . 60,000
July . . . . . . . . . . . . . . . . . . 40,000
August . . . . . . . . . . . . . . . 36,000
September . . . . . . . . . . . . . 32,000
The large buildup in sales before and during June is due to Fathers Day. Ending
inventories are supposed to equal 90% of the next months 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 months 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 companys monthly operating expenses are given below:
Variable:
Sales commissions . . . . . . . $1 per tie
Fixed:
Wages and salaries . . . . . . . $22,000
Utilities . . . . . . . . . . . . . . . . . $14,000
Insurance . . . . . . . . . . . . . . . . . $1,200
Depreciation . . . . . . . . . . . . . . $1,500
Miscellaneous . . . . . . . . . . . . . $3,000
All operating expenses are paid during the month, in cash, with the exception of
depreciation and insurance expired. Land will be purchased during May for $25,000 cash.
The company declares dividends of $12,000 each quarter, payable in the first month of
the following quarter. The companys balance sheet at March 31 is given below:
.:.
The company has an agreement with a bank that allows the company to borrow in
increments of $1,000 at the beginning of each month, up to a total loan balance of
$40,000. 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:
Prepare a master budget for the three-month period ending June 30. Include the following
detailed budgets:
1. 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.
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.
SOLUTION:
1. a. Sales budget:
April
May
June
Quarter
Budgeted sales in units ..........
35,000
45,000
60,000
140,000
Selling price per unit ..............
$8
$8
$8
$8
Total sales ..............................
$280,000
$360,000
$480,000
$1,120,000
b. Schedule of expected cash collections:
February sales ........................
$ 48,000
March sales ............................
112,000
$ 56,000
April sales ..............................
70,000
140,000
$ 70,000
280,000
90,000
180,000
270,000
120,000
120,000
May sales ...............................
June sales ...............................
Total cash collections .............
48,000
168,000
$230,000
$286,000
$370,000
$ 886,000
35,000
45,000
60,000
140,000
inventory* ..........................
40,500
54,000
36,000
36,000
Total needs .............................
75,500
99,000
96,000
176,000
Less beginning inventory.......
31,500
40,500
54,000
31,500
c. Merchandise purchases budget:
Budgeted sales in units ..........
Add budgeted ending
Required unit purchases .........
44,000
58,500
42,000
144,500
Unit cost .................................
$5
$5
$5
$5
Required dollar purchases......
$220,000
$292,500
$210,000
$ 722,500
June
Quarter
*90% of the next months sales in units.
d. Budgeted cash disbursements for merchandise purchases:
April
March purchases ..............
$ 85,750
April purchases ................
110,000
May
$ 85,750
$110,000
May purchases .................
146,250
June purchases .................
Total cash disbursements .
2.
$195,750
$256,250
220,000
$146,250
292,500
105,000
105,000
$251,250
$ 703,250
Cravat Sales Company
Cash Budget
For the Three Months Ending June 30
April
May
June
$ 14,000
$ 10,250
$ 10,000
$ 14,000
(Part 1 b.) .................................
230,000
286,000
370,000
886,000
Total cash available .....................
244,000
296,250
380,000
900,000
d.) .........................................
195,750
256,250
251,250
703,250
Sales commissions ...................
35,000
45,000
60,000
140,000
Salaries and wages ...................
22,000
22,000
22,000
66,000
Utilities ....................................
14,000
14,000
14,000
42,000
Miscellaneous ..........................
3,000
3,000
3,000
9,000
Cash balance, beginning..............
Quarter
Add receipts from customers
Less disbursements:
Purchase of inventory (Part 1
Dividends paid .........................
12,000
12,000
Land purchases ........................
25,000
25,000
Total disbursements .....................
281,750
365,250
350,250
997,250
(37,750)
(69,000)
Borrowings ..............................
48,000
79,000
Repayments* ...........................
(16,000)
(16,000)
Interest* ...................................
(3,020)
(3,020)
Total financing ............................
48,000
79,000
(19,020)
Cash balance, ending...................
$ 10,250
$ 10,000
Excess (deficiency) of receipts
over disbursements ..................
29,750
(97,250)
Financing:
0
$ 10,730
127,000
107,980
$ 10,730
* This is the maximum amount (in increments of $1,000) that the company could
repay to the bank and still have at least a $10,000 ending balance.
** $48,000 1% 3
$1,440
$79,000 1% 2
1,580
Total interest
$3,020
3.
Cravat Sales Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales revenue (Part 1 a.) .........................................
$1,120,000
Variable expenses:
Cost of goods sold
(140,000 ties @ $5 per tie) ..............................
$700,000
Commissions
(140,000 ties @ $1 per tie) ..............................
Contribution margin ...............................................
140,000
840,000
280,000
Fixed expenses:
Wages and salaries ..............................................
66,000
Utilities ................................................................
42,000
Insurance expired ................................................
3,600
Depreciation ........................................................
4,500
Miscellaneous .....................................................
9,000
125,100
Net operating income..............................................
154,900
Less interest expense ..............................................
3,020
Net income..............................................................
$ 151,880
4.
Cravat Sales Company
Budgeted Balance Sheet
June 30
Assets
Cash (Part 2) .........................................................................................
$ 10,730
Accounts receivable (see below) ..........................................................
450,000
Inventory (36,000 ties @ $5 per tie).....................................................
180,000
Unexpired insurance ($14,400 $3,600) .............................................
10,800
Fixed assets, net of depreciation
($172,700 + $25,000 $4,500).........................................................
193,200
Total assets ............................................................................................
$844,730
Liabilities and Equity
Accounts payable, purchases
(50% $210,000 from Part 1 c.) ......................................................
$105,000
Dividends payable ................................................................................
12,000
Loans payable, bank (Part 2; $127,000 $16,000) ..............................
111,000
Capital stock, no par .............................................................................
300,000
Retained earnings (see below) ..............................................................
316,730
Total liabilities and equity ....................................................................
Accounts receivable at June 30:
25% May sales of $360,000......................................
$ 90,000
75% June sales of $480,000......................................
360,000
Total .............................................................................
$450,000
Retained earnings at June 30:
Balance, March 31 .......................................................
$176,850
Add net income (Part 3) ...............................................
151,880
Total .............................................................................
328,730
Less dividends declared ...............................................
12,000
Balance, June 30 ..........................................................
$316,730
$844,730
