CASE [402, LO4, LO8, LO9, LO10] excel 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 manage- ment 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 CHECK FIGURE impression on the president and have assembled the information below. (2) June ending cash The company desires a minimum ending cash balance each month of $10,000. The ties are sold to balance: $10,730; retailers for $8 each. Recent and forecasted sales in units are as follows: (3) Net income: $151,880 January (actual). 20,000 June . 60,000 February (actual) . 24,000 July .. 40,000 March (actual) 28,000 August ..... 36,000 April .... 35,000 September ....... 32,000 May ........... 45,000 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 ....... $3,000All 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 com- pany's balance sheet at March 31 is given below: Accounts receivable ($48000 February sales, SN R $168,000 March sales) S QOO Inventory (31,500 units)... S 157,500 Prepaid insurance................ L e 14,400 " Fixed assets, net of depreclat:on esensitei s NIRRT Total assets... .......................... ............. $5?4;800 7 - Liabilities and Smekholders Equity g Acoountspayabla AN $.;._85_;'750 / Dividends payable .............. : 12,000 COmMMON SIOCK........couverncnnerns .. 300,000 ~ Retained earnmgs AR i VT BN L Tolal lmbmes and shod(holders' equuty e $5?4 600 easaanarasaas wae 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 $140,000. 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 pos- sible (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. Abudgeted income statement for the three-month period ending June 30. Use the contribution approach. 4. A budgeted balance sheet as of June 30. ETHICS CHALLENGE [LOI] Granger Stokes, managing partner of the venture capital firm of Halston and Stokes, was dissatisfied with the top management of PrimeDrive, a manufacturer of computer disk drives. Halston and Stokes had invested $20 million in PrimeDrive, and the return on their investment had been below expectations for several years. In a tense meeting of the board of directors of PrimeDrive, Stokes exercised his firm's rights as the major equity investor in PrimeDrive and fired PrimeDrive's chief executive officer (CEO). He then quickly moved to have the board of directors of PrimeDrive appoint himself as the new CEO. Stokes prided himself on his hard-driving management style. At the first management meeting, he asked two of the managers to stand and fired them on the spot, just to show everyone who was in control of the company. At the budget review meeting that followed, he ripped up the departmental budgets that had been submitted for his review and yelled at the managers for their \"wimpy, do nothing targets.\" He then ordered everyone to submit new budgets calling for at least a 40% increase in sales volume and announced that he would not accept excuses for results that fell below budget. Keri Kalani, an accountant working for the production manager at PrimeDrive, discovered toward the end of the year that her boss had not been scrapping defective disk drives that had been returned by customers. Instead, he had been shipping them in new cartons to other customers to avoid booking losses. Quality control had deteriorated during the year as a result of the push for increased volume, and returns of defective disk drives were running as high as 15% of the new drives shipped. When she confronted her boss with her discovery, he told her to mind her own business. And then, to justify his actions, he said, \"All of us managers are finding ways to hit Stokes's targets.\