You have just been hired as a management trainee by Cravat Sales Company, a nationwide distributor of a designers silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. 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 anxious to make a favorable impression on the president and have assembled the information below.

The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each. Recent and forecasted sales in units are as follows:

January (actual) 25,000 June 68,000

February (actual) 33,000 July 44,000

March (actual) 28,000 August 40,000

April 41,000 September 35,000

May 48,000

The large buildup in sales before and during June is due to Fathers Day. Ending inventories are supposed to equal 90% of the next months sales in units. The ties cost the company $5 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 25% of a months sales are collected by month-end. An additional 50% is collected in the following month, and the remaining 25% is collected in the second month following sale. Bad debts have been negligible.

The companys monthly selling and administrative expenses are given below:

Variable:

Sales commissions $ 1 per tie

Fixed:

Wages and salaries $ 27,500

Utilities $ 18,200

Insurance $ 1,200

Depreciation $ 1,500

Miscellaneous $ 3,000

All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Land will be purchased during May for $22,000 cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The companys balance sheet at March 31 is given below:

Assets

Cash $ 10,000

Accounts receivable ($66,000 February sales; $168,000

March sales) 234,000

Inventory (36,900 units) 184,500

Prepaid insurance 14,400

Fixed assets, net of depreciation 150,450

Total assets $ 593,350

Liabilities and Stockholders Equity

Accounts payable $ 99,250

Dividends payable 12,000

Capital stock 300,000

Retained earnings 182,100

Total liabilities and stockholders equity $ 593,350

The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $150,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $10,000 in cash.

Required:

1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

a. A sales budget by month and in total.

Sales Budget:

April May June Quarter (total)

Budgeted Sales in units

Selling Price per unit

Total sales $ $ $ $

b. A schedule of expected cash collections from sales, by month and in total: (Leave no cells blank - be certain to enter "0" wherever required.)

Schedule of Expected Cash Collections:

April May June Quarter - Total

February sales $ $ $ $

March sales

April sales

May sales

June sales

Total cash collections $ $ $ $

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Input all amounts as positive values.)

Merchandise Purchases Budget:

April May June Quarter - Total

Budgeted sales in units:

Add: Budget ending inventory:

Total needs:

Deduct: beginning inventory:

Required unit purchases:

Unit cost:

Required dollar purchases:

d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. (Leave no cells blank - be certain to enter "0" wherever required.)

Budgeted Cash Disbursements for Merchandise Purchases:

April May June Quarter - Total

March purchases:

April purchases:

May purchases:

June purchases:

Total cash payments:

2. A cash budget: Show the budget by month and in total. (Input all amounts as positive values except cash deficiency, repayments and interest which should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Total Financing should be indicated with a minus sign when the company is repaying amounts that were previously borrowed.)

Cash Budget:

For the Three Months Ending June 30

April May June Quarter - Total

Cash balance, beginning :

Add receipts from customers:

Total cash available:

Less disbursements:

Purchase of inventory

Sales commissions

Salaries and wages

Utilities

Miscellaneous

Dividends paid

Land purchases

Total disbursements

Excess (deficiency) of receipts over disbursements

Financing:

Borrowings

Repayments

Interest

Total financing

Cash balance, ending $ $ $ $

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. (Input all amounts as positive values, except losses which should be indicated with a minus sign.)

Budgeted Income Statement:

For the Three Months Ended June 30

Sales Revenue

Variable expenses:

Cost of Goods Sold

Commissions

Fixed expenses:

Wages and Salaries

Utilities

Insurance Expired:

Depreciation

Miscellaneous

Net Operating Income

Net Income

4. A budgeted balance sheet as of June 30. (Be sure to list the assets and liabilities in order of their liquidity.)

Budgeted Balance Sheet:

June 30

Assets:

Cash

Accounts receivable

Inventory

Unexpired insurance

Fixed assets, net of depreciation

Total Assets:

Liabilities & Stockholders Equity

Accounts payable, purchases

Dividends payable

Loans payable, bank

Capital stock, no par

Retained earnings

Total liabilities and stockholders equity: