Question
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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