Knoch Unlimited, a nationwide distributoriof low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date the company's budgeting practices have been inferior, and, at times, the company has experienced a cash shortage You have been given responsibility for all planning and budgeting. Your rst assignment is to prepare a master budget for the next three months, starting April 1. You are anx- ious to make a favourable impression on the president and have assembled the information below. The necklaces are sold to retailers for $10 each. Recent and forecasted sales in units are as follows: January (actual) .............. 20,000 June ..................... 50000 February (actual) ............. 20000 July ...................... 30000 March (actual) ................ 40,000 August .................... 28000 April .......................... 55,000 September ............... 25000 May .......................... 100,000 The large buildup in sales before and during May is due to Mother's Day. Ending inventories should be equal to 40% of the next month's sales in units. The necklaces cost the company $4 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 dis- count, and payable within 15 days. The company has found, however, that only 20% of a month's sales are collected by month-end. An additional 70% 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. Variable: Sales commissions ...................................... 4% of sales Fixed: Advertising ............................................. $200000 Rent .................................................... 18000 Wages and salaries ...................................... 108,000 Utilities ................................................. 7000 Insurance ............................................... 3,000 Depreciation ............................................ 14,000 All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June: both purchases will be paid in cash. The company declares dividends of $15,000 each quarter, payable in the rst month of the following quarter. The company's balance sheet at March 31 is given below: Assets Cash ....................................................... 3 74,000 Accounts receivable ($28,000 February sales: $320,000 March sales) ................................... 348.000 Inventory ................................................... 104,000 Prepaid insurance ........................................... 21,000 Fixed assets, net ofdepreciation ............................ 950000 Total assets ................................................. $1,495,000 liabilities and Shareholders' Equity Accounts payable ........................................... 3 100000 Dividends payable ........................................... 15.000 Common shares ............................................ 800000 Retained eamings ........................................... 580000 Total liabilities and shareholders' equity ...................... $1,495,000 The company wants a minimum ending cash balance each month of $50,000. All borrow- ing is done at the beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month
