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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) . . . . . . . . . 20,000
February (actual) . . . . . . . . 24,000
March (actual) . . . . . . . . . . 28,000
April . . . . . . . . . . . . . . . . . . 35,000
May . . . . . . . . . . . . . . . . . . 45,000
June . . . . . . . . . . . . . . . . . . 60,000
July . . . . . . . . . . . . . . . . . . 40,000
August . . . . . . . . . . . . . . . 36,000
September . . . . . . . . . . . . . 32,000
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 operating expenses are given below:
Variable:
Sales commissions . . . . . . . $1 per tie
Fixed:
Wages and salaries . . . . . . . $22,000

Utilities . . . . . . . . . . . . . . . . . $14,000
Insurance . . . . . . . . . . . . . . . . . $1,200
Depreciation . . . . . . . . . . . . . . $1,500
Miscellaneous . . . . . . . . . . . . . $3,000
All operating 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:

.:.
The company has an agreement with a bank that allows the company to borrow in
increments of $1,000 at the beginning of each month, up to a total loan balance of
$40,000. 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:
Prepare a master budget for the three-month period ending June 30. Include the following
detailed budgets:
1. a. A sales budget by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.

c. A merchandise purchases budget in units and in dollars. Show the budget by month
and in total.
d. A schedule of expected cash disbursements for merchandise purchases, by month and
in total.
2. A cash budget. Show the budget by month and in total.
3. A budgeted income statement for the three-month period ending June 30. Use the
contribution approach.
4. A budgeted balance sheet as of June 30.

SOLUTION:
1. a. Sales budget:

April

May

June

Quarter

Budgeted sales in units ..........

35,000

45,000

60,000

140,000

Selling price per unit ..............

$8

$8

$8

$8

Total sales ..............................

$280,000

$360,000

$480,000

$1,120,000

b. Schedule of expected cash collections:


February sales ........................

$ 48,000

March sales ............................

112,000

$ 56,000

April sales ..............................

70,000

140,000

$ 70,000

280,000

90,000

180,000

270,000

120,000

120,000

May sales ...............................

June sales ...............................


Total cash collections .............

48,000
168,000

$230,000

$286,000

$370,000

$ 886,000

35,000

45,000

60,000

140,000

inventory* ..........................

40,500

54,000

36,000

36,000

Total needs .............................

75,500

99,000

96,000

176,000

Less beginning inventory.......

31,500

40,500

54,000

31,500

c. Merchandise purchases budget:


Budgeted sales in units ..........
Add budgeted ending

Required unit purchases .........

44,000

58,500

42,000

144,500

Unit cost .................................

$5

$5

$5

$5

Required dollar purchases......

$220,000

$292,500

$210,000

$ 722,500

June

Quarter

*90% of the next months sales in units.


d. Budgeted cash disbursements for merchandise purchases:
April
March purchases ..............

$ 85,750

April purchases ................

110,000

May

$ 85,750
$110,000

May purchases .................

146,250

June purchases .................


Total cash disbursements .
2.

$195,750

$256,250

220,000
$146,250

292,500

105,000

105,000

$251,250

$ 703,250

Cravat Sales Company


Cash Budget
For the Three Months Ending June 30
April

May

June

$ 14,000

$ 10,250

$ 10,000

$ 14,000

(Part 1 b.) .................................

230,000

286,000

370,000

886,000

Total cash available .....................

244,000

296,250

380,000

900,000

d.) .........................................

195,750

256,250

251,250

703,250

Sales commissions ...................

35,000

45,000

60,000

140,000

Salaries and wages ...................

22,000

22,000

22,000

66,000

Utilities ....................................

14,000

14,000

14,000

42,000

Miscellaneous ..........................

3,000

3,000

3,000

9,000

Cash balance, beginning..............

Quarter

Add receipts from customers

Less disbursements:
Purchase of inventory (Part 1

Dividends paid .........................

12,000

12,000

Land purchases ........................

25,000

25,000

Total disbursements .....................

281,750

365,250

350,250

997,250

(37,750)

(69,000)

Borrowings ..............................

48,000

79,000

Repayments* ...........................

(16,000)

(16,000)

Interest* ...................................

(3,020)

(3,020)

Total financing ............................

48,000

79,000

(19,020)

Cash balance, ending...................

$ 10,250

$ 10,000

Excess (deficiency) of receipts


over disbursements ..................

29,750

(97,250)

Financing:
0

$ 10,730

127,000

107,980
$ 10,730

* This is the maximum amount (in increments of $1,000) that the company could
repay to the bank and still have at least a $10,000 ending balance.
** $48,000 1% 3

$1,440

$79,000 1% 2

1,580

Total interest

$3,020

3.

Cravat Sales Company


Budgeted Income Statement
For the Three Months Ended June 30
Sales revenue (Part 1 a.) .........................................

$1,120,000

Variable expenses:
Cost of goods sold
(140,000 ties @ $5 per tie) ..............................

$700,000

Commissions
(140,000 ties @ $1 per tie) ..............................
Contribution margin ...............................................

140,000

840,000
280,000

Fixed expenses:
Wages and salaries ..............................................

66,000

Utilities ................................................................

42,000

Insurance expired ................................................

3,600

Depreciation ........................................................

4,500

Miscellaneous .....................................................

9,000

125,100

Net operating income..............................................

154,900

Less interest expense ..............................................

3,020

Net income..............................................................

$ 151,880

4.

Cravat Sales Company


Budgeted Balance Sheet
June 30
Assets
Cash (Part 2) .........................................................................................

$ 10,730

Accounts receivable (see below) ..........................................................

450,000

Inventory (36,000 ties @ $5 per tie).....................................................

180,000

Unexpired insurance ($14,400 $3,600) .............................................

10,800

Fixed assets, net of depreciation


($172,700 + $25,000 $4,500).........................................................

193,200

Total assets ............................................................................................

$844,730

Liabilities and Equity


Accounts payable, purchases
(50% $210,000 from Part 1 c.) ......................................................

$105,000

Dividends payable ................................................................................

12,000

Loans payable, bank (Part 2; $127,000 $16,000) ..............................

111,000

Capital stock, no par .............................................................................

300,000

Retained earnings (see below) ..............................................................

316,730

Total liabilities and equity ....................................................................


Accounts receivable at June 30:
25% May sales of $360,000......................................

$ 90,000

75% June sales of $480,000......................................

360,000

Total .............................................................................

$450,000

Retained earnings at June 30:


Balance, March 31 .......................................................

$176,850

Add net income (Part 3) ...............................................

151,880

Total .............................................................................

328,730

Less dividends declared ...............................................

12,000

Balance, June 30 ..........................................................

$316,730

$844,730