Question
Walker Products fell behind in paying its vendors, and it now has a poor credit rating. Consequently, all suppliers demand cash on delivery (even employees
Walker Products fell behind in paying its vendors, and it now has a poor credit rating. Consequently, all suppliers demand cash on delivery (even employees are paid on a daily basis). The firm has a note payable on which principal payments have been suspended. The firm must pay interest on this note at the rate of 1.5% of the beginning balance. If Walker misses even one interest payment, the bank will initiate bankruptcy proceedings. The following is Walker's balance sheet as of October 1.
Assets |
| Liabilities and Equity |
|
---|---|---|---|
Cash | $7,000 | Notes payable | $90,000 |
Accounts receivable (net) | 24,000 | Common stock | 75,000 |
Inventory | 39,000 | Retained earnings (deficit) | (15,000) |
Plant & equipment (net) | 80,000 | Total liabilities and equity | $150,000 |
Total assets | $150,000 |
|
|
Walker sells its product for $25 per unit. The purchase cost is $15 per unit. Budgeted sales for October are 2,500 units, and ending budgeted inventory is 2,000 units. Typically, 60% of Walker's customers pay in the month of sale, 35% in the month following purchase, and 5% never pay.
Walker's employees are paid strictly on commission, based on 10% of sales. The firm depreciates its fixed assets at the rate of $2,000 per month. All other selling and administrative costs amount to $15,000 per month.
REQUIRED
A. Prepare a cash receipts and disbursements budget for October.
B. Prepare a budgeted income statement for October.
C. Prepare the budgeted balance sheet as of the end of October.
D. Is the firm operating at a profit or loss? What level of sales is needed to break even?
(Hint: Treat commissions and expected bad debts as variable costs.)
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