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In: Accounting

Please answer a and b Durianx Inc. distributes a electronic chessboards The following information was gathered...

Please answer a and b

Durianx Inc. distributes a electronic chessboards The following information was gathered to prepare the budget for the third quarter.

Each unit of chessboard is budgeted to sell for an average price of $175. Unit sales are expected to be as follows:

June

9,600 Units

July

9,700 Units

August

10,500 Units

September

11,900 Units

October

12,000 Units

Sales are made for cash and on credit. The following collection pattern is used to estimate monthly cash collections:

Cash sales

30%

Credit sales—month of sale

40

Credit sales—month after sale

26

Uncollectible

4

 Total

100%

The company tries to maintain an inventory of 20% of the following month's sales. The company expects to have 1,940 Units on hand on June 30. Durianx pays an average of $125 per Units.

The company pays for 60% of its purchases in the month of purchase and the remaining 40% in the month after purchase.

The following monthly selling and administrative expenses are planned for t­­he quarter.

July

Aug

Sept

Depreciation

$10,000

$20,000

$20,000

Rent

30,000

30,000

30,000

Advertising

50,000

50,000

50,000

Salaries

350,000

350,000

370,000

Bad debts

67,900

73,500

83,300

On August 1st , the company plans to purchase $500,000 of new office equipment and a delivery truck. Additional depreciation is already accounted for in the above selling and administrative expenses.

Durianx will collect the full $436,800 accounts receivable balance of June 30th in July. Durianx will pay the $481,000 of June Accounts Payable in July.

Durianx wants to maintain a minimum cash balance of $40,000. An open line of credit at a local bank allows the company to borrow up to $500,000 per quarter in $1,000 increments.

All borrowing is done at the beginning of the month, and all repayments are made at the end of a month in $1,000 increments. Accrued interest on the loan is paid only when principal is repaid. The interest rate is 12% per year. This means that if the loan is not reimbursed during the quarter then no interest expense is paid during that time.

Durianx's tax rate is 30%.

The June 30 balance sheet is budgeted as follows:

June 30

Cash

$  70,000

Accounts receivable

436,800

Inventory

242,500

Plant & equipment

600,000

Accumulated depreciation

(150,000)

 Total assets

$ 1,199,300

Accounts payable

$ 481,000

Common stock

200,000

Retained earnings

518,300

 Total liabilities and equities

$ 1,199,300

Required

  1. ( 34 marks ) Prepare all components of Durianx's master budget for the third quarter (Sales Budget, Selling and Administrative Expense Budget, Inventory Purchases Budget, Ending Inventory Budget, Cash Receipts Budget, Cash Payments for Inventory Budget, and Cash Budget)

Prepare a pro-forma income statement for the third quarter.

Prepare a pro-forma balance sheet as of September 30.

  1. ( 8 marks ) Sales manager proposes to decrease the selling price of each unit by $20, to $155. The decrease in the selling price will result in an increase in the number of unit sold by 15%.
    1. Which type of expense do you expect to increase with 15% increase in number of units sold? Which type of expense do you expect to remain unchanged? Explain and give one example for each type of expense.
    2. What will be the net effect on Cash and Net income before income taxes for the quarter ending September 30th? Would you recommend management to implement this proposal? Explain

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