Unit 6 Exercise

Question 1:

TabComp Inc. is a retail distributor for MZB-33 computer hardware and related software. TabComp prepares annual sales forecasts, of which the first six months of the coming year are presented below:

	Hardware Units	Hardware Dollars	Software	Total Sales
January	130	$390,000	$160,000	$550,000
February	120	360,000	140,000	500,000
March	110	330,000	150,000	480,000
April	90	270,000	130,000	400,000
May	100	300,000	125,000	425,000
June	125	375,000	225,000	600,000

Cash sales account for 25% of TabComp's total sales, 30% of the total sales are paid by bank credit card, and the remaining 45% are on open account (TabComp's own charge accounts). The cash and bank credit card sale payments are received in the month of the sale. Bank credit card sales are subject to a 4% discount, which is deducted immediately. The cash receipts for sales on open account are 70% in the month following the sale and 28% in the second month following the sale; the remaining are uncollectible. TabComp's month-end inventory requirements for computer hardware units are 30% of the next month's sales. The units must be ordered two months in advance due to long lead times quoted by the manufacturer. Required:

1. Calculate the cash that TabComp can expect to collect during April. Show all of your calculations.
2. Determine the number of computer hardware units that should be ordered in January. Show all of your calculations.

Question 2:

Peak sales for Blizzard Inc, a wholesale distributor of snow shovels, occur in November. The companys sales budget for the fourth quarter showing these peak sales is given below:

	October	November	December	Total
Budgeted sales (all on account)	$400,000	$800,000	$700,000	$1,900,000

From past experience, the company has learned that 25% of a months sales are collected in the month of sale, another 70% are collected in the month following sale, and the remaining 5% are collected in the second month following sale. Bad debts are negligible and can be ignored. August sales totaled $70,000, and September sales totaled $180,000.

Required:

1. Prepare a schedule of expected cash collections from sales, by month and in total, for the third quarter.
2. Assume that the company will prepare a budgeted balance sheet as of September 30. Compute the accounts receivable as of that date.

Question 3:

An incomplete monthly flexible budget is given below for Bubbles Inc., a company that owns and operates a large automatic car wash facility.

Bubbles Inc.
Flexible Budget
		Monthly Activity (car washed)
	Per Car	7,000	8,000	9,000
Sales	?	?	$80,000	?
Variable expenses:
Cleaning supplies	?	?	6,000	?
Utilities	?	?	4,800	?
Maintenance	?	?	1,200	?
Total variable expenses	?	?	?	?
Contribution margin	?	?	?	?
Fixed expenses:
Operator wages		?	10,000	?
Depreciation		?	20,000	?
Rent		?	8,000	?
Insurance		?	1,000	?
Selling and administrative		?	4,000	?
Total fixed expenses		?	43,000	?
Operating income		?	?	?

Required:

1. Fill in the missing data in the flexible budget.

Question 4:

Five years ago, Phil Coulson left his position at a large company to start Coulson Spy Solutions Co. (CSS), a software design and tracking company. CSSs first product was a unique software package that seamlessly integrates networked PCs. Robust sales of this initial product permitted the company to begin development of other software products and to hire additional personnel. The staff at CSS quickly grew from three people working out of Phils basement to more than 70 individuals working in leased spaces at an industrial park. Continued growth led Coulson to hire seasoned marketing, distribution, and production managers and an experienced accountant.

Recently, Coulson decided that the company had become too large to run on an informal basis and that a formalized planning and control program centered around a budget was necessary. Coulson asked the accountant, Maria Hill, to work with him in developing the initial budget for CSS.

Coulson forecasted sales revenues based on his projections for both the market growth for the initial software and successful completion of new products. Hill used this data to construct the master budget for the company, which she then broke down into departmental budgets. Coulson and Hill met a number of times over a three-week period to hammer out the details of the budgets.

When Coulson and Hill were satisfied with their work, the various departmental budgets were distributed to the department managers with a cover letter explaining CSSs new budgeting system. The letter requested everyones assistance in working together to achieve the budget objectives. Several of the department managers were displeased with how the budgeting process was undertaken. In discussing the situation among themselves, they felt that some of the budget projections were overly optimistic and not realistically attainable.

Required:

1. How does the budgeting process Coulson and Smith used at CSS differ from recommended practice?
2. What are the behavioural implications of the way Coulson and Hill went about preparing the master budget?