Question

You have just been hired as a new management trainee by Ace Wholesale, Inc a distributor of

brooms to various retail outlets located in shopping malls across the country. In the past, the

company has done very little in the way of budgeting and at certain times of the year has

experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of brooms, but all are sold for the same price—$10 per unit.

Actual sales of brooms for the last three months and budgeted sales for the next six months follow (in units of brooms):

January (actual) 20,000

February (actual) 24,000

March (actual) 40,000

April (budget) 100,000

May (budget) 160,000

June (budget) 90,000

July (budget) 80,000

August (budget) 36,000

September (budget) 32,000

The concentration of sales before and during May is due to Graduation Days. Sufficient inventory should be on hand at the end of each month to supply 45% of the bracelets sold in the following month. Suppliers are paid $4 for a broom. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 22% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 8% is collected in the second month following sale. Monthly operating expenses for the company are given below:

Variable:

Sales commissions 5% of Sales

Fixed:

Advertising $200,000

Rent $18,000

Salaries $106,000

Utilities $7,000

Insurance $3,000

Depreciation $14,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $16,000 in new equipment during May and $40,000 in new

equipment during June; both purchases will be for cash. The company declares dividends of

$15,000 each quarter, payable in the first month of the following quarter.

The company’s balance sheet at March 31 is given below:

Assets

Cash $74,000

Accounts receivable (net) 331,200

Inventory 180,000

Prepaid insurance 21,000

Property and equipment (net) 950,000

Total assets $1,556,200

Liabilities and Stockholders’ Equity

Accounts payable $134,000

Dividends payable 15,000

Common stock 800,000

Retained earnings 607,200

Total liabilities and stockholders’ equity $1,556,200

The company maintains a minimum cash balance of $50,000. All borrowing is done at the

beginning of a month; any repayments are made at the end of a month.

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. 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 $50,000 in cash.

Required:

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

detailed budgets:

* A merchandise purchases budget in units and in dollars. Show the budget by month and in total?

* A schedule of expected cash disbursements for merchandise purchases, by month and in total?

* A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000?

Answer 1

Answer is given below with all workings