QUESTION II LO 7 Master and Cash Budget 24 marks

Basket Company specializes in unique baskets. Peak sales for one of their products, the Easter basket, occur in March every year. The company has estimated the following sales for the first five months of the year for the Easter basket.

Month	Expected sales in units	Month	Expected sales in units
January	2,000	April	1,000
February	3,000	May	500
March	10,000

The baskets are considered deluxe as they are very intricate. As such, the company can sell the baskets for $30 each. Based on history, the company expects that 10% of sales are cash. Of the credit sales, half are collected the month of the sale and the remainder are collected the month following the sale. Accounts receivable as at January 1^st was $50,000; all of which is expected to be collected in January.

To protect against inventory shortages, the company has a policy that ending finished goods inventory is 20% of the following months sales. The company had ending inventory on December 31^st of 500 units.

Each basket requires 2 meters of plastic. The cost per meter is $2.00. The company wants to ensure it always has enough plastic on hand and therefore has indicated that ending inventory will be 10% of the following months production needs for plastic. The company had 1,080 meters of plastic on hand as at January 1^st and plans to have 200 meters on hand at the end of the quarter. The company puts all purchases of plastic on account and pays for it the month following purchase. Purchases of plastic from December amounted to $2,000.

Due to the intricate design, the company uses substantially all production line workers to create the baskets. Each basket takes 1.5 hours to produce and the direct labour rate per hour is $12.00.

The company expects to incur $40,000 of operating expenses each month, this includes $5,000 of depreciation expense. The company plans to pay cash dividends of $3,000 in January.

There is a minimum cash balance set by management of $5,000 at the end of each month. The company has access to a line of credit. Any borrowings and repayments must be made in multiples of $1,000. The company is subject to a 5% annual interest rate but only pays interest on the amount of repayment (interest continues to accrue on the principle amount to be repaid with future principle payments). For simplicity, assume interest is not compounded. Assume that borrowings are made at the beginning of the month when it is needed and repayments are made at the end of the month when sufficient cash is available. The company started the year with $10,000 in the bank.

Required:

1. Create a sales budget for the first quarter of the year. Include information for the quarter in your response.
2. Create a production budget for the first quarter of the year. Include information for the quarter in your response.
3. Create a direct materials budget for the first quarter of the year including the both the number of units to be purchased and the cost of the raw materials. Include information for the quarter in your response.
4. Create a direct labour budget for the first quarter of the year. Include information for the quarter in your response.
5. Create a cash budget for the first quarter of the year. Include in your cash budget expenses for direct material and direct labour based on your budgets in #3, #4. Note: you should create a cash collections schedule & a cash disbursements for direct materials inventory schedule. You do not need to include the quarter column for the cash budget.
6. Identify the accounts receivable and accounts payables amounts for the period ending March 31st.

Note: for all questions requiring background calculations, show your work