Chapter 7 CASE 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 management 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 impression on the president and have assembled the information below. The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each35000*. Recent and forecasted sales in units are as follows: January (actual)... February (actual). March (actual)..... April .............................. May .............................................. 20,000 24,000 28,000 35,000 45,000 June.... July ... August .... September 60,000 40,000 36,000 32,000 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: $1 per tie Variable: Sales commissions ........ Fixed: Wages and salaries....... Utilities ... Insurance...................... Depreciation.. Miscellaneous ................ $22,000 $14,000 $1,200 $1,500 $3,000 All 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 company's balance sheet at March 31 is given below: $ 14,000 Assets Cash.. Accounts receivable ($48,000 February sales; $168,000 March sales). Inventory (31,500 units)... Prepaid insurance.................. Fixed assets, net of depreciation. Total assets. Liabilities and Stockholders' Equity Accounts payable Dividends payable ....... Common stock.... Retained earnings Total liabilities and stockholders' equity ........... 216,000 157,500 14,400 172,700 $574,600 $ 85,750 12,000 300,000 176,850 $574,600 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 possible (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 sales budget by month and in total. 2. A schedule of expected cash collections from sales, by month and in total. 3. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. 4. 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. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. 4. A budgeted balance sheet as of June 30. CRAVAT SALES COMPANY 10,000 Minimum ending monthly cash balance Selling price Recent and forecast sales (in units): January (actual) February (actual) March (actual) April May June July August September 20,000 24,000 28,000 35,000 45,000 60,000 40,000 36,000 32,000 Desired ending inventories (percentage of next month's sales) Cost of earrings 90% Purchases paid as follows: In month of purchase In following month 50% 50% Collection on sales: Sales collected current month Sales collected following month Sales collected 2nd month following 25% 50% 25% Monthly selling and administrative expenses: Variable: Sales commissions (per tie) 1.00 Fixed: Wages and salaries Utilities Insurance Depreciation Miscellaneous 22,000 14,000 1,200 1,500 3,000 Land purchased in May Dividends declared each quarter 25,000 12,000 Balance sheet at March 31: Assets $ 14,000 $ 48,000 168,000 Cash Accounts receivable February sales March sales Inventory (31,500 units) Prepaid insurance Fixed assets, net of depreciation Total assets 216,000 157,500 14,400 172,700 574,600 $ Liabilities and Stockholders' Equity Accounts payable Dividends payable Common stock Retained earings Total liabilities and stockholders' equity 85,750 12,000 300,000 176,850 574,600 $ Agreement with Bank: Borrowing increments Maximum borrowing amount Interest rate per month Repayment increments Total of interest paid each quarter Required minimum cash balance 1,000 140,000 1% 1,000 100% 10,000 $ $ CRAVAT SALES COMPANY Budgets April May June Quarter 1a. Sales budget: Budgeted sales in units Selling price per unit Total sales 35,000 8 $ 280,000 $ Correct! 45,000 8 $ 360,000 $ Correct! 6 0,000 140,000 8 $ 480,000 $ 1,120,000 Correct! Correct! S 1b. Schedule of expected cash collections: February sales March sales April sales May sales June sales Total cash collections 1c. Merchandise purchases budget: Budgeted sales in units Add budgeted ending inventory Total needs Less beginning inventory Required unit purchases Unit cost Required dollar purchases 1d. Budgeted cash disbursements for merchandise purchases: March purchases April purchases May purchases June purchases Total cash payments CRAVAT SALES COMPANY Cash Budget For the Three Months Ending June 30 April May June Quarter Cash balance, beginning Add receipts from customers Total cash available Less disbursements: Purchase of inventory Sales commissions Salaries and wages Utilities Miscellaneous Dividends paid Land purchases Total disbursements Excess (deficiency) of receipts over disbursements Financing: Borrowings Repayments Interest Total financing Cash balance, ending CRAVAT SALES COMPANY Budgeted Income Statement For the Three Months Ended June 30 Sales in units Sales revenue Variable expenses: Cost of goods sold Commissions Contribution margin Fixed expenses: Wages and salaries Utilities Insurance expired Depreciation Miscellaneous Net operating income Less interest expense Net income CRAVAT SALES COMPANY Budgeted Balance Sheet June 30 Assets Cash Accounts receivable Inventory Unexpired insurance Fixed assets, net of depreciation Total assets Liabilities and Stockholders' Equity Accounts payable, purchases Dividends payable Loans payable, bank Capital stock, no par Retained eamings Total liabilities and equity Accounts receivable at June 30: May sales June sales Total Retained eamings at June 30: Balance, March 31 Add net income Total Less dividends declared Balance, June 30