Question

You have just been hired as a management trainee by Cravat Sales Company, a nationwide distributor of a designer’s 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 $12,000. The ties are sold to retailers for $8.10 each. Recent and forecasted sales in units are as follows:

January (actual)	20,000	June	65,000
February (actual)	24,000	July	40,000
March (actual)	28,000	August	36,000
April	33,000	September	32,000
May	41,000

The large buildup in sales before and during June is due to Father’s Day. Ending inventories are supposed to equal 75% of the next month’s sales in units. The ties cost the company $4.85 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 30% of a month’s sales are collected by month-end. An additional 60% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

The company’s monthly selling and administrative 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 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 $30,000 cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:

Assets
Cash	$	14,000
Accounts receivable ($19,440 February sales; $158,760   March sales)		178,200
Inventory (24,750 units)		120,037.50
Prepaid insurance		14,400
Fixed assets, net of depreciation		172,700
Total assets	$	499,337.50
Liabilities and Stockholders’ Equity
Accounts payable	$	76,993.75
Dividends payable		12,000
Capital stock		300,000
Retained earnings		110,343.75
Total liabilities and stockholders’ equity	$	499,337.50

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 $300,000. 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 $12,000 in cash.

Part 1a. Create a sales budget by month and the total for the 2^nd quarter.

Part 1b. Create a schedule for budgeted cash collections from sales and accounts receivable.

Part 1c. Create a purchases budget in units and dollars. Note: this company is a merchandiser, so no production budget is needed. Instead, a purchases budget will be used (since the company will be buying inventory instead of manufacturing it).  

Part 1d. Create a cash disbursements budget for purchases by month and the total for the quarter.

Answer 1