Hats$-$Off Limited, a na$0$on$-$wide distributor of branded baseball caps, has an exclusive franchise

for the distribu$0$on of the caps. Sales for Hats$-$Off have increased rapidly over the past year and

while the company is doing well its budge$0$ng system is struggling to keep up with the growth

and poor planning has led to the company experiencing unexpected cash shortages. You have

just been hired as the company$$s first budge$0$ng officer and you are eager to make a good first

impression on the senior management team. Your first project is to develop a master budget for

the company$$s third quarter $($July $1$ September $30).$ You have gathered the informa$0$on below.

The baseball caps are sold to retailers for $$15$ each. Actual unit sales for the second quarter and

budgeted unit sales for the third quarter plus October are as follows:

Units

May $($actual$)100,000$

June $($actual$)120,000$

July $($budgeted$)125,000$

August $($budgeted$)130,000$

September $($budgeted$)120,000$

October $($budgeted$)140,000$

Ending inventories should be equal to $25\%$ of the following month$$s sales. The baseball caps

cost the company $$8$ each. Purchases from the supplier are paid as follows:

$60\%$ in month of purchase

$40\%$ in month following purchase

All sales to retailers are made on account with no discounts offered and cash receipts from

customers as follows:

$25\%$ collected in the month of sale

$65\%$ collected in the month following the sale

$10\%$ collected in the second month following the sale

As the sales are made to established retailers, there are no bad debts. The company$$s monthly

selling and administra$0$ve expenses are as follows:

Variable:

Sales commissions $5\%$ of sales

Fixed:

Adver$0$sing $$450,000$

Rent $20,000$

Salaries and wages $185,000$

Power and heat $34,000$

Insurance $4,000$

Deprecia$0$on $20,000$

All selling and administra$0$ve expenses are paid in the month they are incurred except for rent

which is paid every six months in February and August. Deprecia$0$on is a non$-$cash expense and

includes deprecia$0$on on the new equipment. The company plans to purchase new equipment

cos$0$ng $$80,000$ in September. The company declared a $$50,000$ dividend in June that is payable

in July.

The following is the company$$s balance sheet at June $30$:

ASSETS

Cash $ $100,000$

Accounts receivable $($from May & June sales$)1,500,000$

Inventory $250,000$

Prepaid rent $20,000$

Fixed assets $($net of deprecia$0$on$)860,000$

TOTAL ASSETS $$2,730,000$

LIABILITIES & SHAREHOLDERS$$ EQUITY

Accounts payable $ $388,000$

Dividends payable $50,000$

Common shares $940,000$

Retained earnings $1,352,000$

TOTAL LIABILITIES & SHAREHOLDERS$$ EQUITY $$2,730,000$

The company is required to maintain a minimum cash balance of $$100,000$ at the end of each

month. All borrowing on the company$$s line of credit is done at the beginning of each month

and repayments are made at the end of the month and borrowing must be done in increments

of $$1,000.$ The interest rate on the line of credit is $1\%$ per month and must be paid at the end of

each month based on the loan outstanding for that month.

Required:

$1.$ Prepare a master budget for the three$-$month period ending September $30$ and include

the following schedules:

a$.$ A sales budget by month and in total.

b$.$ A schedule of cash collec$0$ons from sales by month and in total.

c$.$ A merchandise purchases budget in units and in dollars. Show the budget by

month and in total.

d$.$ A schedule of expected cash disbursements for merchandise purchases by month

and in total.

$2.$ A cash budget by month and in total for the three$-$month period ending September $30.$

$3.$ A budgeted income statement for the three$-$month period ending September $30.$ Use

the contribu$0$on format.

$4.$ A budgeted balance sheet as at September $30.$