[kendrap36]

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:
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
382 Chapter 8
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.
The company’s monthly selling and administrative 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 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 $25,000 cash. The
company declares dividends of $12,000 each quarter, payable in the first month of the following
quarter. The company’s balance sheet at March 31 is given below:
Assets
Cash.. . $ 14,000
Accounts receivable ($48,000 February sales;
$168,000 March sales).. . 216,000
Inventory (31,500 units).. . 157,500
Prepaid insurance.. . 14,400
Fixed assets, net of depreciation.. . 172,700
Total assets.. . $574,600
Liabilities and Stockholders’ Equity
Accounts payable.. . $ 85,750
Dividends payable.. . 12,000
Capital stock.. . 300,000
Retained earnings.. . 176,850
Total liabilities and stockholders’ equity.. . $574,600
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 $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.