Durianx Inc. distributes a electronic chessboards The following information was gathered to prepare the budget for the third quarter. Each unit of chessboard is budgeted to sell for an average price of $175. Unit sales are expected to be as follows: June July August September October 9,600 Units 9,700 Units 10,500 Units 11,900 Units 12,000 Units Sales are made for cash and on credit. The following collection pattern is used to estimate monthly cash collections: Cash sales Credit salesmonth of sale Credit salesmonth after sale Uncollectible Total 30% 40 26 100% The company tries to maintain an inventory of 20% of the following month's sales. The company expects to have 1,940 Units on hand on June 30. Durianx pays an average of $125 per Units. The company pays for 60% of its purchases in the month of purchase and the remaining 40% in the month after purchase. The following monthly selling and administrative expenses are planned for the quarter. JULY AUG SEPT DEPRECIATION RENT ADVERTISING SALARIES BAD DEBTS $10,000 30,000 50,000 350,000 67,900 $20,000 30,000 50,000 350,000 73,500 $20,000 30,000 50,000 370,000 83,300 On August 1st, the company plans to purchase $500,000 of new office equipment and a delivery truck. Additional depreciation is already accounted for in the above selling and administrative expenses. Durianx will collect the full $436,800 accounts receivable balance of June 30th in July. Durianx will pay the $481,000 of June Accounts Payable in July. Durianx wants to maintain a minimum cash balance of $40,000. An open line of credit at a local bank allows the company to borrow up to $300,000 per quarter in $1,000 increments. All borrowing is done at the beginning of the month, and all repayments are made at the end of a month in $1,000 increments. Accrued interest on the loan is paid only when principal is repaid. The interest rate is 12% per year. This means that if the loan is not reimbursed during the quarter then no interest expense is paid during that time. Durianx's tax rate is 30%. The June 30 balance sheet is budgeted as follows: Cash Accounts receivable Inventory Plant & equipment Accumulated depreciation Total assets June 30 $ 70,000 436,800 242,500 600,000 (150,000) $ 1,199,300 Accounts payable Common stock Retained earnings Total liabilities and equities $ 481,000 200,000 518,300 $ 1,199,300 Required a. (34 marks ) Prepare all components of Durianx's master budget for the third quarter (Sales Budget, Selling and Administrative Expense Budget, Inventory Purchases Budget, Ending Inventory Budget, Cash Receipts Budget, Cash Payments for Inventory Budget, and Cash Budget) Prepare a pro-forma income statement for the third quarter. Prepare a pro-forma balance sheet as of September 30. b. (8 marks ) Sales manager proposes to decrease the selling price of each unit by $20, to $155. The decrease in the selling price will result in an increase in the number of unit sold by 15%. i. Which type of expense do you expect to increase with 15% increase in number of units sold? Which type of expense do you expect to remain unchanged? Explain and give one example for each type of expense. (4 marks) What will be the net effect on Cash and Net income before income taxes for the quarter ending September 30th? Would you recommend management to implement this proposal? Explain (4 marks)
