Question

1. Prepare a sales budget for January through May. The selling price per unit is $40.00.

December of the previous year-40,000

January-90,000

February-80,000

March-70,000

April-40,000

2. Prepare a purchases budget for January through March, and the first quarter in total. Assume that the company only sells one product that can be purchased at $15.00 per unit. The market for this product is very competitive and customers highly value service such as quality and on time delivery of the product. Also assume that currently it is company policy that ending inventory should equal 5% of next month’s projected sales.

3. Prepare a cash budget for January through March and for the first quarter in total. The company maintains a minimum cash balance of $50,000.00, and this was the balance in the cash account on January 1. Past experience shows that 30% of sales are collected in the month of the sale, and 70% in the month following the sale. Labor cost is $15 per unit. Other expenses include $37,000 per month for rent, $4,000 for advertising, and $6,000 per month for depreciation. All costs are paid in the current month except inventory purchases, which are paid in the month following purchase (i.e. January purchases are paid in February). On January 1^st there was an accounts receivable balance of $60,000 and an outstanding accounts payable balance of $100,000. The company has an open line of credit with a bank and can borrow at an annual rate of 12%. For simplification assume that all loans are made at the beginning of the month when borrowing is needed and repayments are made at the end of a month when there is enough cash to make the payment. Also, interest is only paid at the time when a repayment is made. Additionally, all loans and repayments (not the interest portion) can only be made in increments of $1000 and the company would like to pay its debts, or a portion thereof, as soon as it has enough cash to do so.

I did questions 1 and 2, I need help with 3. Thanks!

Answer 1

Ans-3- Preparing a cash budget for January through March and for the first quarter in total:-

Particulars	December	January	February	March	1st Quarter
Sales	$1,600,000 (40,000units *$40 per unit)	$3,600,000 (90,000 units *$40 per unit )	$3,200,000 (80,000 units *$40 per unit )	$2,800,000 (70,000 units *$40 per unit)	$9,600,000
Cash Receipts:-
Opening Cash		$50,000	$394,000	$2,618,000	$50,000
Cash from sales (30%)		$1,080,000 ($3,600,000*30%)	$960,000 ($3,200,000*30%)	$840,000 ($2,800,000*30%)	$2,880,000
Collection from previous month credit sales (70%)		$1,120,000 ($1,600,000*70%)	$2,520,000 ($3,600,000*70%)	$2,240,000 ($3,200,000*70%)	$5,880,000
Total cash receipts (A)		$2,250,000	$3,874,000	$5,698,000	$8,810,000
Cash disbursements:-
Rent		$37,000	$37,000	$37,000	$111,000
Advertising		$4,000	$4,000	$4,000	$12,000
Inventory purchses		$1,815,000	$1,215,000	$1,065,000	$4,095,000
Total disbursements (B)		$1,856,000	$1,256,000	$1,106,000	$4,218,000
Surplus (deficit) of cash (A-B)		$394,000	$2,618,000	$4,592,000	$4,592,000
Add: Borrowings		$0	$0	$0	$0
Less: Repayment of loan		$0	$0	$0	$0
Less: Interest on borrowings		$0	$0	$0	$0
Cash balance at end		$394,000	$2,618,000	$4,592,000	$4,592,000

Working Note:-

Preparing a purchase budget for january to march and for the first quarter:-

Particulars	December	January	February	March	1st Quarter
Sales units (A)	40,000	90,000	80,000	70,000	240,000
Add: Ending inventory (90% of the next month's projected sales)	81,000 (90,000*90%)	72,000 (80,000*90%)	63,000 (70,000*90%)	36,000 (40,000*90%)	36,000
Less: Beginning inventory	0	81,000	72,000	63,000	81,000
Raw material needed to purchase	121,000	81,000	71,000	43,000	195,000
Cost of raw material per unit	$15	$15	$15	$15	$15
Purchase budget for Jan to March	$1,815,000	$1,215,000	$1,065,000	$645,000	$2,925,000

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