SECTION A- Answer ONE question from Section A. QUESTION ONE CrossMan Corporation, a rapidly expanding crossbow manufacturer, is in the process of formulating plans for the first quarter of 2021. Joan Caldwell, director of marketing, has completed her sales budget and is confident the sales estimates will be met or exceeded. While most of the products are sold to retailers on credit terms, the company also sells its products directly to its customers through their own shops. The following budgeted data has been extracted from the company's operating budgets from December 2020 to March 2021. Sales to Raw materials Sales to retailers () December 2020 customers () 80,000 100,000 200,000 1000,000 800,000 1000,000 1,600,000 purchases () 400,000 1,200,000 800,000 January 2021 February 2021 March 2021 550,000 1,400,000 George Brownell, the assistant chief accountant, has been given the responsibility for formulating the cash budget, which is a critical element during a period of rapid expansion. The following information provided by the different managers will be used in preparing the cash budget. 1. CrossMan has experienced an excellent record in debt collection and expects this trend to continue in 2021. It is estimated that approximately 60% of the sales to retailers will be collected (in cash) at the time of the sale and the remaining 40% will be received one month later. 2. Sales to customers in CrossMan's shops are all in cash and received at the time of sale. 3. The purchase of raw materials is CrossMan's largest expenditure. Prior experience shows that all purchases are paid in full in the month following purchase. 4. Hourly wages, including fringe benefits, are budgeted at 720,000 per year payable equally every month. 5. Rent is budgeted at 200,000 per year. The company pays 50,000 every three months with the first payment due in January 2021. [CONTINUED] 6. A marketing and advertising campaign will be launched in January 2021 at a cost of 120,000, which will be paid immediately. This campaign will continue throughout the year and will generate additional costs of 30,000 per month, starting from February 2021. These costs are paid in the month in which they occur. 7. Overheads are expected to be 180,000 per month of which half is paid in the month in which they occur and the rest in the following month. You should ignore any payments related to the month of December. 8. Equipment and warehouse facilities will be acquired to support the company's rapidly growing revenues. A new machine costing 600,000 will be purchased in January 2021. The machine will be paid for in twelve equal instalments beginning in January 2021. 9. The opening bank balance on 1st January 2021 is forecast to be 80,000. 10. CrossMan has a corporate policy of maintaining an end-of-month cash balance of 250,000. Cash is borrowed, as needed, to maintain this balance. The annual interest rate on borrowed funds is expected at 12%, all of which will be paid at the end of March 2021. Required: a) Prepare a cash budget for CrossMan Corporation on a monthly basis and in total for the first quarter (January to March 2021). Support your answer by showing the following sections clearly for each month and in total: cash receipts (15 marks), cash disbursements (15 marks), surplus or deficit (10 marks), and financing (including interest calculation) (10 marks) (50 marks) b) Discuss why cash budgeting is particularly important for a rapidly expanding company such as CrossMan Corporation. (10 marks) [TOTAL: 60 MARKS]
