CRAVAT SALES COMPANY
Minimum ending cash balance				$12,000
Selling price (per unit)				$8.10
Recent and forecast sales (in units):
January (actual)				20,000
February (actual)				24,000
March (actual)				28,000
April				33,000
May				41,000
June				65,000
July				40,000
August				36,000
September				32,000
Desired ending inventories (percentage				75%
of next month's sales)
Cost of ties (per unit)				$4.85
Purchases paid as follows:
In month of purchase				50%
In following month				50%
Collection on sales:
Sales collected current month				30%
Sales collected following month				60%
Sales collected 2nd month following				10%
Variable monthly expenses:
Sales commissions (per tie)				$1.00
Fixed monthly expenses:
Wages and salaries				$22,000
Utilities				$14,000
Insurance				$1,200
Depreciation				$1,500
Miscellaneous				$3,000
Land purchased in May				$30,000
Dividends declared each quarter				$12,000
Balance sheet at March 31:
Assets
Cash				$14,000
Accounts receivable
February sales			$19,440
March sales			158,760	178,200
Inventory (24,750 units)				120,037.50
Prepaid insurance				14,400
Fixed assets, net of depreciation				172,700
Total assets				$499,337.50
Liabilities and Stockholders' Equity
Accounts payable				$76,993.75
Dividends payable				12,000
Capital stock				300,000
Retained earnings				110,343.75
Total liabilities and stockholders' equity				$499,337.50
Agreement with Bank:
Borrowing increments				$1,000
Maximum borrowing amount				$300,000
Interest rate per month				1%
Repayment increments				$1,000
Total of interest paid each quarter				100%
Required minimum cash balance				$12,000

Master Budget with Supporting Schedules 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 $12,000. The ties are sold to retailers for $8.10 each. Recent and forecasted sales in units are as follows: January (actual) 20,000 June February (actual) 24.000 July March (actual) 28,000 August April 33,000 September May 41,000 65,000 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 75% of the next month's sales in units. The ties cost the company $4.85 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 30% of a month's sales are collected by month-end An additional 60% 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: $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 $30,000 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 ($19,440 February sales: $158.760 March sales) Inventory (24.750 units) Prepaid insurance Fixed assets, net of depreciation Total assets 178,200 120,037.50 14,400 172.700 $ 499,337.50 Liabilities and Stockholders' Equity Accounts payable $ 76,993.75 Dividends payable 12,000 Capital stock 300,000 Retained earnings 110,343.75 Total liabilities and stockholders' equity $ 499,337.50 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 $300,000. 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 $12,000 in cash. Part 3. This part requires you to create a budgeted income statement from the previous parts and additional information given in the case. Use formulas wherever possible, including any derived numbers (i.e. COGS, commissions). Use formulas whenever you calculate numbers. CRAVAT SALES COMPANY Budgeted Income Statement For the Three Months Ended June 30 Sales in units Sales Variable expenses Cost of goods sold Commissions Contribution margin Fixed expenses: Salaries and wages Utilities Insurance expired Depreciation Miscellaneous Net operating income Less interest expense Net income