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ABCD Inc. distributes a new gaming console, called A-box, in BC. The following information was gathered to prepare the budget for the third quarter. A-Boxes

ABCD Inc. distributes a new gaming console, called A-box, in BC. The following information was gathered to prepare the budget for the third quarter.

A-Boxes are budgeted to sell for an average price of $180. Unit sales are expected to be as follows:

June

10,000 A-Boxes

July

10,500 A-Boxes

August

10,800 A-Boxes

September

12,600 A-Boxes

October

14,600 A-Boxes

Sales are made for cash and on credit. The following collection pattern is used to estimate monthly cash collections:

Cash sales

25%

Credit salesmonth of sale

50

Credit salesmonth after sale

23

Uncollectible

2

Total

100%

The company tries to maintain an inventory of 25% of the following month's sales. The company expects to have 2,500 A-Boxes on hand on June 30. ABCD pays an average of $120 per A-Box.

The company pays for 70% of its purchases in the month of purchase and the remaining 30% in the month after purchase.

The following monthly selling and administrative expenses are planned for the quarter, though advertising will have a one-time $50,000 increase in August to secure orders for the Xmas season. Depreciation for August and September will increase due to additional capital assets to be purchased in August (see below).

July

Aug

Sept

Depreciation

$10,000

$32,500

$32,500

Rent

50,000

50,000

50,000

Advertising

60,000

110,000

84,000

Salaries

300,000

300,000

300,000

Bad debts

37,800

38,880

45,360

On August 1st, the company plans to purchase $500,000 of new office equipment and a delivery truck. Additional depreciation is already accounted for in the aboveselling and administrative expenses.

ABCD will collect the full $500,000 accounts receivable balance of June 30thin July. ABCD will pay the $340,000 of June Accounts Payable in August.

ABCD wants to maintain a minimum cash balance of $100,000. An open line of credit at a local bank allows the company to borrow up to $300,000 per quarter in $1,000 increments.

All borrowing is done at the beginningof the month, and all repayments are made at the end of a monthin $1,000 increments. Accrued interest is paid only when principal is repaid. The interest rate is 12% per year.

ABCD's tax rate is 30%.

The June 30 balance sheet is budgeted as follows:

June 30

Cash

$ 70,000

Accounts receivable

500,000

Inventory

300,000

Plant & equipment

600,000

Accumulated depreciation

(150,000)

Total assets

$1,320,000

Accounts payable

$340,000

Common stock

400,000

Retained earnings

580,000

Total liabilities and equities

$1,320,000

Required

a.Prepare all components of ABCD's master budget for the third quarter (Sales Budget,Selling and Administrative Expense Budget,Inventory Purchases Budget,Ending Inventory Budget,Cash Receipts Budget,Cash Payments for Inventory Budget, andCash Budget)

b.Prepare a pro-forma income statement for the third quarter.

c.Prepare a pro-forma balance sheet as of September 30.

d.Sales manager proposes to increase the selling price of each A-Box by $10, to $190. This increase will result in sales in units to drop by only 10%.

i.Which costs do you expect to decline with 10% decline in number of units sold? Explain.

ii.What is your recommendation about this proposal? Explain

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