FOOD SERVICE COMPANY, INC.

Food Service Company, Inc. sells packaged meals to the airlines. Even though the company has been in business for several years, because of continued problems experienced by the airlines, the company has lost several major customers in recent years and finds it very difficult to plan operations and cash requirements on an annual basis. As a result, the company has asked you to prepare a budget for the remaining quarter of 2015 in the hopes of better controlling sales and costs.

You are the accounting manager. The charge to you is to:

I. Prepare the master budget.

a selling and administrative budget for the quarter.

a cash budget for the quarter.

The following is the information you will need:

Sales Forecast:

October - 26,000 meals

November - 32,000 meals

December - 41,000 meals

January - 20,000 meals

The airlines will be charged $4.00 for each meal; they are required to pay 25% of the cost in the month of delivery, 60% the following month and the remaining 15% in the next month; no bad debts are expected. (September sales were 22,000 meals).

Purchases and inventory levels:

The company buys the meals wholesale from a local restaurant and pays an average of $1.50 for each meal. Because the meals can be frozen and, in order to keep up with unexpected demand, especially during the Thanksgiving and Christmas holidays, the company keeps a minimum inventory of 10% of the next month's expected sales.

The company must pay 60% of the cost of the meals in the month they are purchased and 40% in the following month.

Selling and Administrative expenses:

Four salesmen work for the company and sell to the major airlines. They have a base salary of $1,000 each per month and also earn a combined commission of 10% of sales. The salaries are paid in the month the sales are made and the commission is paid the following month.

In addition, a trucking company delivers the meals from either the restaurant or company freezer to the airline. The charge is $.10 per meal and is paid in the month of delivery.

Other costs of the company are estimated to be:

Telephone $ 500 mo. *

Rent 1,000 mo.

Office salaries 3,000 mo.

Insurance 12,000 per year

Utilities 300 mo. *

Supplies 100 mo. *

Advertising (paid the lst day of the qtr.) 300 per quarter

* indicates they are paid in the month following usage. All other expenses are paid in the month incurred unless otherwise noted.

The company has office equipment costing $25,000 which is expected to last 5 years and office furniture costing $50,000 which is expected to last 10 years. There is no salvage value.

The company had to borrow $30,000 in January of 2005; the terms of the loan was 10% per year, with interest paid yearly and the principal due December 31, 2017. The minimum cash on hand that the company feels it must keep is $5,000. Should the cash budget indicate an ending cash balance below $5,000, a line of credit for the company can be accessed? Any principal borrowed is due on the last day of the quarter; however, the interest must be paid in the following month.

The balance sheet as of September 30, 2015 is as follows:

	Food Service Company, Inc.
	Balance Sheet
	September 30, 2015
	Assets

Current assets:

Cash $ 7,500

Accounts receivable 66,000

Inventory 3,900

Prepaid expenses 3,000

Supplies 100

Total current assets 80,500

Property, plant and equipment:

Office equipment 25,000

Office furniture 50,000

Less accumulated depreciation (27,500)

Net property and equipment 47,500

$ 128,000

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable $ 14,100

Commissions payable 2,200

Interest payable 2,250

Total current liabilities 18,550

Long-term liabilities:

Note payable 30,000

Stockholders' equity:

Common stock 50,000

Retained earnings 29,450

Total stockholders' equity 79,450

$ 128,000