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)	28,000	June	62,000
February (actual)	25,000	July	49,000
March (actual)	33,000	August	36,000
April	44,000	September	36,000
May	51,000

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	$	27,100
Utilities	$	20,700
Insurance	$	1,000
Depreciation	$	1,500
Miscellaneous	$	3,200

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 $25,000 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	$	11,000
Accounts receivable ($50,000 February sales; $198,000 March sales)		248,000
Inventory (39,600 units)		198,000
Prepaid insurance		12,000
Fixed assets, net of depreciation		128,550
Total assets	$	597,550
Liabilities and Stockholders Equity
Accounts payable	$	107,250
Dividends payable		12,000
Capital stock		300,000
Retained earnings		178,300
Total liabilities and stockholders equity	$	597,550

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
Budgeted sales in units
Selling price per unit
Total sales

b.

A schedule of expected cash collections from sales, by month and in total.

Cravat Sales Company
Schedule of Expected Cash Collections
	April	May	June	Quarter
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.

Cravat Sales Company
Merchandise Purchases Budget
	April	May	June	Quater
Budgeted sales in units
Add: Budgeted 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.

Cravat Sales Company
Budgeted Cash Disbursements for Merchandise Purchases
	April	May	June	Quarter
March purchases
April purchases
May purchases
June purchases
Total cash payments

2.

A cash budget. Show the budget by month and in total.(Cash deficiency, repayments and interest should be indicated by a minus sign.)

Cravat Sales Company
Cash Budget
For the Three Months Ending June 30
	April	May	June	Quarter
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.

Cravat Sales Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales revenue
Variable expenses:
Cost of goods sold
Commissions
Contribution margin
Fixed expenses:
Wages and salaries
Utilities
Insurance expired
Depreciation
Miscellaneous
Net operating income
Interest expense
Net income

4.

A budgeted balance sheet as of June 30.

Cravat Sales Company Budgeted Balance Sheet June 30 Assets Cash

Accounts receivable

Inventory

Unexpired insurance

Fixed assets, net of depreciation

Total assets

Liabilities and Stockholders Equity Accounts payable, purchases

Dividends payable

Loans payable, bank

Capital stock, no par

Retained earnings

Total liabilities and stockholders equity