Question

1. Prepare a sales budget for the first quarter (Q1) and the first quarter in total. The selling price per unit is $50.00.

December 50,000/ January 70,000/February 100,000 /March 60,000 / April 100,000

Past experience shows that 45% of sales are collected in the month of the sale, and 55% in the month following the sale.

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 $35.00 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 45% of next month’s projected sales. All costs are paid in the current month except inventory purchases, which are paid in the month following the purchase (i.e. January purchases are paid in February).

3. Prepare a cash budget for January through March and for the first quarter in total. The company maintains a minimum cash balance of $70,000, and this was the balance in the cash account on January 1^st. Other expenses include $35,000 per month for rent, $24,000 per month for advertising, and $66,000 per month for depreciation. In addition, variable Selling & Administrative cost is $12 per unit sold, and the company paid a $20,000 dividend in February.

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 if there is enough cash to make the payment. Also, interest associated with a loan is only paid at the time when that loan or a portion thereof is paid. 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.

4. Prepare the Budgeted Income Statement based on the information given above.

5. Repeat steps 2-4 for budget scenarios B and C using the following Desired Ending Inventory assumptions:

	Ending Inventory
B.	90%
C.	5%

Answer 1

1)

Sales Budget In $
Particualrs	Jan	Feb	Mar	Total
Sales Unit (A)	70000	100000	60000	230000
Sales Price (B)	50	50	50	50
Total Sales (A*B)	3500000	5000000	3000000	11500000

2)

Purchase Budget
Particulars	Jan	Feb	Mar	Total
Sales Unit (A)	70000	100000	60000	230000
Ending Inventory (B) 45 % of next month sale	45000	27000	45000	117000
Opening Inventory ( C )	31500	45000	27000	103500
Units Purchased (D)=A+B-C	83500	82000	78000	243500
Purchase Price ( E )	35	35	35	35
Total Purchase D*E	2922500	2870000	2730000	8522500

3)

Cash Budget
Particulars	Jan	Feb	Mar	Total
Opening Balance of Cash (A)	70000	70000	70000	210000
Cash Collection from Sale
a) 45% of current Month Sale	1575000	2250000	1350000	5175000
b) 55% of Previous month sale	1375000	1925000	2750000	6050000
Total Cash Received (B)	2950000	4175000	4100000	11225000
Payment
Purchases of Previous Month	2065000	2922500	2870000	7857500
Rent	35000	35000	35000	105000
Advertising	24000	24000	24000	72000
Variable and selling& administration	840000	1200000	720000	2760000
Dividend	0	20000	0	20000
Total Cash Paid (C)	2964000	4201500	3649000	10814500
Excess/Shortfall (D)= A+B-C	56000	43500	521000	620500
Borrowing F = E - D	14000	26500	0	40500
Repayment	0	0	-40000	-40000
Interest	0	0	-540	-540
Closing Balance of cash ( E )	70000	70000	479960	619960

Notes ; Payment for purchase of Jan = Purchase of dec , Opening stock is 45% of the current month sales

Purchase Budget
Particualrs	dec
Sales Unit (A)	50000
Ending Inventory (B) 45 % of next month sale	31500
Opening Inventory ( C )	22500
Units Purchased (D)=A+B-C	59000
Purchase Price ( E )	35
Total Purchase D*E	2065000

Interest calculation
	Jan	Feb	March	Total
Borrowings    (X)	14000	26500	0	40500
no of month outstanding till payment (Y)	2	1	0
Rate of Interest   (Z)	0.12	0.12	0
Interest X*Y*Z/12	280	265	0	545

Notes: the amount repaid Is in multiple of 1000 i.e = 26000 +14000 =40000

4)

Budgeted Income statement
Particulars	Jan	Feb	March	Total
Sales	3500000	5000000	3000000	11500000
Less: Direct Material	2922500	2870000	2730000	8522500
Rent	35000	35000	35000	105000
Advertising	24000	24000	24000	72000
Variable and selling& administration	840000	1200000	720000	2760000
Depreciation	66000	66000	66000	198000
Interest	0	0	540	540
Net Income/(Loss)	-387500	805000	-575540	-158040

5) A ) If ending Inventory is 90%

Purchase Budget
Particulars	Jan	Feb	Mar	Total
Sales Unit (A)	70000	100000	60000	230000
Ending Inventory (B) 90 % of next month sale	90000	54000	90000	234000
Opening Inventory ( C )	63000	90000	54000	207000
Units Purchased (D)=A+B-C	97000	64000	96000	257000
Purchase Price ( E )	35	35	35	35
Total Purchase D*E	3395000	2240000	3360000	8995000

Budgeted Income statement
Particulars	Jan	Feb	March	Total
Sales	3500000	5000000	3000000	11500000
Less: Direct Material	3395000	2240000	3360000	8995000
Rent	35000	35000	35000	105000
Advertising	24000	24000	24000	72000
Variable and selling& administration	840000	1200000	720000	2760000
Depreciation	66000	66000	66000	198000
Interest	0	0	11570	11570
Net Income/(Loss)	-860000	1435000	-1216570	-641570

Interest calculation
	Jan	Feb	March	Total
Borrowings    (X)	329000	499000	0	828000
no of month outstanding till payment (Y)	2	1
Rate of Interest   (Z)	0.12	0.12
Interest X*Y*Z/12	6580	4990		11570

B) If Ending inventory is 5%

Purchase Budget
Particulars	Jan	Feb	Mar	Total
Sales Unit (A)	70000	100000	60000	230000
Ending Inventory (B) 5 % of next month sale	5000	3000	5000	13000
Opening Inventory ( C )	3500	5000	3000	11500
Units Purchased (D)=A+B-C	71500	98000	62000	231500
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