Knockoffs Unlimited, a nationwide distributor of 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 first assignment is to prepare a master budget for the next three months, starting April 1. You are eager 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 forecast sales in units are as follows: January (actual) February (actual) March (actual) April May 27,000 40,000 53,000 79,000 113,000 June July August September 64,000 44,000 42,000 39,000 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 discount, 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: 4% of sales Variable: Sales commissions Fixed: Advertising Rent Wages and salaries Utilities Insurance Depreciation $242,000 25,000 122,800 12,600 5,800 28,000 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 $21,600 in new equipment during May and $54,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $17,800 each quarter, payable in the first month of the following quarter. The company's balance sheet at March 31 is given below: $ 88,000 Assets Cash Accounts receivable ($40,000 February sales; $424,000 March sales) Inventory Prepaid insurance Fixed assets, net of depreciation Total assets Liabilities and Shareholders' Equity Accounts payable Dividends payable Common shares Retained earnings Total liabilities and shareholders' equity 464,000 126,400 40,600 1,020,000 $1,739,000 $ 126,800 17,800 940,000 654,400 $1,739,000 The company wants a minimum ending cash balance each month of $50,000. All borrowing 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. b. A schedule of expected cash collections from sales, by month and in total. Answer is complete and correct. February sales March sales April sales May sales June sales Total cash collections KNOCKOFFS UNLIMITED Schedule of Expected Cash Collections April May June S 40,000 371,000 53,000 158,000 553,000 79,000 226,000 791,000 128,000 IS 569,000 S 832,000 $ 998,000 Quarter s 40,000 424,000 790,000 1,017,000 128,000 S 2,399,000 c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. Answer is complete and correct. Budgeted sales in units Add: Budgeted ending inventory Total needs Less: Beginning inventory Required unit purchases Unit cost Required dollar purchases KNOCKOFFS UNLIMITED Merchandise Purchases Budget April May 79,000 113,000 45,200 25,600 124,200 138.600 (31,600) (45,200) 92,600 93,400 $ 4 4 $ 4 $ 370,400 $ 373,600 June 64,000 17,600 81,600 ( (25,600) 56,000 $ 4 $ 224,000 Quarter 256,000 17,600 273,600 (31,600) 242.000 $ 4 4 $ 968,000 d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. Answer is complete and correct. March purchases April purchases May purchases June purchases Total cash disbursements KNOCKOFFS UNLIMITED Schedule of Expected Cash Disbursements April May June S 126,800 185,200 185,200 186,800 186,800 112,000 S 312,000 S 372,000 $ 298,800 Quarter $ 126,800 370,400 373,600 112,000 $ 982,800 2. A cash budget. Show the budget by month and in total. (Round your intermediate calculations and final answers to the nearest whole dollar. Also, round down your interest calculations to the next whole dollar amount. Cash deficiency, repayments and interest should be indicated by a minus sign. Do not leave any empty spaces; input a 0 wherever it is required.) * Answer is not complete. June Quarter 50,000 $ 88,000 998,000 2,399,000 1,048,000 2,487,000 KNOCKOFFS UNLIMITED Cash Budget For the Three Months Ending June 30 April May Cash balance, beginning S 88,000 $ 50,000 $ $ Add receipts from customers 569,000 832,000 Total cash available 657,000 882,000 Less disbursements: Purchase of inventory 312,000 372,000 Advertising 31,600 45,200 X Rent 242,000 242,000 X Salaries and wages 25,000 X 25,000 % Sales commissions 122,800 X 122,800 x Utilities 12,600 12,600 Dividends paid 21,600 % Equipment purchases 17,800 X Total disbursements 763,800 841,200 Excess (deficiency) of receipts over disbursements (106,800) 40,800 Financing Borrowings 158,384 10,893 Repayments Interest (1,584) (1,693) X Total financing 156,800 9,200 Cash balance, ending S 50,000 S 50,000 $ 298,800 25,600 X 242,000 X 25,000 X 122,800 X 12,600 54,000 X 982,800 102,400 X 726,000 X 75,000 X 368,400 X 37,800 75,600 X 17,800 X 2,385,800 101,200 780,800 267,200 (169,277) (1,693) (170,970) 96,230 $ 169,277 (169,277) (4,969) X (4,969) 96,231 4. A budgeted balance sheet as of June 30. Answer is complete but not entirely correct. KNOCKOFFS UNLIMITED Budgeted Balance Sheet June 30 Assets Cash $ 96,231 Accounts receivable 625,000 Inventory 70,400 Prepaid insurance 23,200 Fixed assets, net of depreciation 1,011,600 Total assets $ 1,826,431 Liabilities and Shareholders' Equity Accounts payable, purchases $ 112,000 Dividends payable 17,800 Common shares 940,000 Retained earnings 756,631 Total liabilities and shareholders' equity $ 1,826,431 3. A budgeted income statement for the three-month period ending June 30. Use the variable costing approach. Answer is not complete. KNOCKOFFS UNLIMITED Budgeted Income Statement For the Three Months Ended June 30 Sales revenue $ 2,560,000 Variable expenses Sales revenue 0 2,560,000 Fixed expenses: 2,560,000 $ 2,560,000