Case Study 1 MBA 6150 Spring B-2 2021 Master Budgeting and Pro-Forma Financial Statements

You have just been assigned to a new manager who believes you have exceptional budgeting skills. Since you began your job last summer, you have been showing management your latest spreadsheets and how you use your new-found knowledge of Managerial Decision Making to make sound business decisions. Your new manager is responsible for the nationwide distribution of the newly developed Self Protection Device (SPD), using an ultrasonic sound emission, DNA material capture via retractable claw, and an amazing 250,000 lumen LED flashing light. Through multiple franchise agreements, sales have grown very rapidly, and the timing is right for you to join her team and to show your skills. You have just been given responsibility for all planning and budgeting of the entire division. Your first assignment is to prepare a master budget for the next three months, starting April 1, 2021. You accept this responsibility with enthusiasm, and you are anxious to impress your new manager and the president of the parent company (Allteq Solutions), who has a very high regard for you. To commence your new role, you have assembled the following pertinent information:

Note: The company desires a minimum ending cash balance each month on $15,000. The SPDs are sold to retailers for $25 each and they are flying off the shelves. Recent forecasted sales in units are provided below: January (actual)	20,000	June	50,000
February (actual)	24,000	July	40,000
March (actual)	28,000	August	36,000
April	38,000	September	32,000
May	65,000

The increased sales volume before and during May is due to Mothers Day with SPD being a favorite. Ending inventories are supposed to be equal to 90% of the next months sales in units. The cost of each SPD is $14.00.

Purchases are paid for in the following manner: 50% in the month of the purchase and the remaining 50% paid in the month following the purchase. All sales to the distributors are made on credit terms with no discount (for now), and payable within 15 days. The SPD division has determined that only 25% of a months sales are collected by the end of the month in which the sale occurred. An additional 50% is collected in the month following the sale, and the remaining 25% is collected in the second month following the sale. Bad debts have been negligible, supporting the credit terms as favorable.

Below is a display of the SPD division monthly selling and administrative expenses: Variable:
Sales Commissions	$ 1 per SPD
Fixed:
Wages and Salaries	$62,000
Utilities	$41,000
Insurance	$1,800
Depreciation	$3,500
Miscellaneous	$14,000

Selling and administrative expenses are all paid during the month, in cash, with the exception of depreciation (of course) and insurance is pre-paid for the duration of the policy. Due a violation of an existing copyright, lawyers for Allteq Solutions have negotiated a one-time infringement penalty to be expensed and paid during May for $200,000 cash. The newly formed SPD division contributes to the corporate dividend at a rate of $125,000 each quarter, payable in the first month of the following quarter. SPDs balance sheet at the end of the first quarter is shown below:

Balance Sheet as of March 31, 2021

Balance Sheet as of March 31, 2021 Assets

Cash

$44,000

Accounts receivable

675,000

Inventory (34,200 units)

478,800

Prepaid insurance

16,200

Fixed assets, net of depreciation

472,700

Total Assets

$1,686,700

Liabilities and Stockholders Equity

Accounts payable

$259,000

Dividends payable

125,000

Capital Stock

750,000

Retained earnings

552,700

Total Liabilities and Stockholders Equity

$1,686,700

An agreement with East Rivers Bank allows to borrow in increments of $1,000 at the beginning of each month, up to a total loan amount of $350,000. The interest rate on these loans is 8% annually (pretty high considering market rates) but the interest is not compounded, meaning this is simple interest only. At quarter end, SPD would pay East Rivers Bank of the all of the accumulated interest on the loan and as much of the balance of the loan as possible (in $1,000 increments) while retaining the minimum $15,000 cash balance. (Hint: use this excel formula to determine the amount needed to borrow) +IF(excess/deficit<15,000,ROUNDUP(-excess/deficit+15,000,-3),0) where excess/deficit = the cell address of where you compute each months cash deficit or excess.

Required:

Prepare a master budget for the three- months ending June 30, 2021. Include the following budget schedules and financial statements:

5) Cash Budget. Show the cash budget by month and in total.

6) Prepare a budgeted Income Statement for the three months ending June 30, 2021. Use the contribution approach.

7) Prepare a budgeted Balance Sheet as of June 30, 2021.

8) Your new manager has asked for your explanation about your experience in preparing this budget. She specifically wants to know your thoughts on the value of all this work and whether the benefits from the work are worth the effort. Prepare a memo (with a heading), no longer than 2 pages, describing your experience from this exercise, and your thoughts on the value of having a Master Budget