Case 9-27 Master Budget with Supporting Schedules [LO2] Knockoffs Unlimited, a nationwide distributor of low-cost Imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company's budgeting practices have been inferior, and at times the company has experienced a cash shortage. 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 eager to make a favourable Impression on the president and have assembled the Information below. The necklaces are sold to retailers for $10 each. Recent and forecast sales in units are as follows: January (actual) February (actual) March (actual) April May 20,000 26,000 June July 50,000 30,000 40,000 August 28,000 65,000 September 25,000 100,000 The large buildup in sales before and during May is due to Mother's Day. Ending Inventories should be equal to 40% of the next month's sales in units. The necklaces cost the company $4 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 20% of a month's sales are collected by month-end. An additional 70% is collected in the following month, and the remaining 10% 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 Fixed: Advertising Rent 4% of sales $200,000 18,000 Wages and salaries Utilities Insurance Depreciation 106,000 7,000 3,000 14,000 All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and Insurance. Insurance Is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company's balance sheet at March 31 is given below: Cash Assets Accounts receivable ($26,000 February sales; $320,000 March sales) Inventory Prepaid insurance Fixed assets, net of depreciation Total assets Accounts payable Dividends payable Liabilities and Shareholders' Equity $ 74,000 346,000 104,000 21,000 950,000 $1,495,000 $ 100,000 15,000 All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and Insurance. Insurance Is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company's balance sheet at March 31 is given below: Cash Assets Accounts receivable ($26,000 February sales; $320,000 March sales) Inventory Prepaid insurance Fixed assets, net of depreciation Total assets Accounts payable Dividends payable Common shares Retained earnings Liabilities and Shareholders' Equity $ 74,000 346,000 104,000 21,000 950,000 $1,495,000 $ 100,000 15,000 800,000 580,000 Total liabilities and shareholders' equity $1,495,000 The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month, with any repayments made at the end of the month. The Interest rate on these loans Is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month. 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. Sales budget April May June Quarter Budgeted sales in units 65,000 100,000 50,000 215,000 Selling price per unit S Total sales S 650,000 10 $ $ 10 $ 10 S 10 1,000,000 $ 500,000 S 2,150,000 b. A schedule of expected cash collections from sales, by month and in total. KNOCKOFFS UNLIMITED Schedule of Expected Cash Collections April May June Quarter February sales $ March sales 26,000 $ 280,000 $ 0 S 0 S 26,000 April sales May sales 130,000 0 40,000 455,000 S 200,000 0 65,000 320,000 650,000 700,000 900,000 b. A schedule of expected cash collections from sales, by month and in total. KNOCKOFFS UNLIMITED Schedule of Expected Cash Collections April May June Quarter February sales $ 26,000 $ 0 0 S 26,000 March sales 280,000 $ 40,000 0 320,000 April sales 130,000 455,000 S 65,000 650,000 May sales June sales 0 200,000 700,000 900,000 0 Total cash collections $ 436,000 $ 695,000 S 100,000 865,000 S 100,000 1,996,000 c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. KNOCKOFFS UNLIMITED Merchandise Purchases Budget April May June Quarter Budgeted sales in units 65,000 100,000 50,000 215,000 Add: Budgeted ending inventory Total needs 40,000 20,000 12,000 12,000 105,000 120,000 62,000 227,000 Less: Beginning inventory Required unit purchases Unit cost 26,000 40.000 20,000 86,000 79,000 80,000 42,000 141,000 S 4 $ 4 S 4 S 4 Required dollar purchases S 316,000 $ 320,000 $ 168,000 S 564,000 d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. KNOCKOFFS UNLIMITED Schedule of Expected Cash Disbursements d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. KNOCKOFFS UNLIMITED Schedule of Expected Cash Disbursements April May June Quarter March purchases April purchases $ 100,000 S 0 S 0 $ 100,000 158,000 S May purchases 0 158,000 160,000 S 0 316,000 June purchases 0 0 Total cash disbursements $ 258,000 $ 318,000 S 160,000 84,000 244,000 $ 320,000 84,000 820,000 2. A cash budget. Show the budget by month and in total. (Round your Intermediate calculations and final answers to the nearest whole dollar. Also, round down your Interest calculations to the next whole dollar amount. Cash deficiency, repayments and Interest should be Indicated by a minus sign. Do not leave any empty spaces; Input a O wherever It is required.) KNOCKOFFS UNLIMITED Cash Budget For the Three Months Ending June 30 Cash balance, beginning Add receipts from customers Total cash available Less disbursements: Purchase of inventory Advertising Rent Salaries and wages Sales commissions Utilities April May June Quarter S 74,000 $ 436,000 51,700 $ 51,783 $ 695,000 865,000 510,000 746,700 916,783 74,000 1,996,000 2,070,000 258,000 318,000 244,000 820,000 200,000 200,000 200,000 600,000 18,000 18,000 18,000 54,000 106,000 106,000 106,000 318,000 26,000 40,000 20,000 86,000 7,000 7,000 7,000 21,000 Dividends paid 15,000 0 0 15,000 Equipment purchases 0 16,000 40,000 56,000 Total disbursements 630,000 705,000 635,000 1,970,000 Excess (deficiency) of receipts over disbursements (120,000) 41,700 281,783 100,000 Financing: Borrowings 170.000 8,300 178,300 2. A cash budget. Show the budget by month and in total. (Round your Intermediate calculations and final answers to the nearest whole dollar. Also, round down your interest calculations to the next whole dollar amount. Cash deficiency, repayments and Interest should be Indicated by a minus sign. Do not leave any empty spaces; Input a O wherever It is required.) Cash balance, beginning Add receipts from customers Total cash available Less disbursements: Purchase of inventory Advertising Rent Salaries and wages Sales commissions Utilities Dividends paid Equipment purchases Total disbursements KNOCKOFFS UNLIMITED Cash Budget For the Three Months Ending June 30 April May June Quarter S 74,000 S 51,700 $ 51,783 $ 436,000 695,000 865,000 74,000 1,996,000 510,000 746,700 916,783 2,070,000 Excess (deficiency) of receipts over disbursements Financing: Borrowings Repayments Interest Total financing Cash balance, ending 258,000 318,000 244,000 820,000 200,000 200,000 200,000 600,000 18,000 18,000 18,000 54,000 106,000 106,000 106,000 318,000 26,000 40,000 20,000 86,000 7,000 7,000 7,000 21,000 15,000 0 0 15,000 0 16,000 40,000 56,000 630,000 705,000 635,000 1,970,000 (120,000) 41,700 281,783 100,000 170,000 8,300 0 178,300 0 0 (178,300) (178,300) (1,700) 168,300 $ 48,300 $ (1,783) 6,517 48,217 $ (1,783) (180,083) (5,266) (5,266) 101,700 S 94,734 3. A budgeted Income statement for the three-month period ending June 30. Use the variable costing approach. KNOCKOFFS UNLIMITED Budgeted Income Statement For the Three Months Ended June 30 3. A budgeted Income statement for the three-month period ending June 30. Use the variable costing approach. KNOCKOFFS UNLIMITED Budgeted Income Statement For the Three Months Ended June 30 Sales revenue Variable expenses: Cost of goods sold Commissions Contribution margin Fixed expenses: Wages and salaries Utilities Insurance Advertising Rent Depreciation $ 2,150,000 0 2,150,000 Operating income Less interest expense Net income 0 2,150,000 $ 2,150,000 4. A budgeted balance sheet as of June 30. KNOCKOFFS UNLIMITED Budgeted Balance Sheet June 30 Assets 4. A budgeted balance sheet as of June 30. KNOCKOFFS UNLIMITED Budgeted Balance Sheet June 30 Assets Total assets $ 0 Liabilities and Shareholders' Equity Total liabilities and shareholders' equity $ 0