Question

Aztec Company sells its product for $160 per unit. Its actual and budgeted sales follow.

	units
April (actual)	7,500	$	1,200,000
May (actual)	3,000		480,000
June (budgeted)	6,500		1,040,000
July (budgeted)	6,000		960,000
August (budgeted)	4,200		672,000

All sales are on credit. Recent experience shows that 24% of credit sales is collected in the month of the sale, 46% in the month after the sale, 25% in the second month after the sale, and 5% proves to be uncollectible. The product’s purchase price is $110 per unit. 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 19% of the next month’s unit sales plus a safety stock of 65 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,632,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $120,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $120,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 11% interest rate. On May 31, the loan balance is $42,500, and the company’s cash balance is $120,000.

. Prepare a schedule that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July.
2. Prepare a schedule that shows the computation of budgeted ending inventories (in units) for April, May, June, and July.
3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month.
4. Prepare a schedule showing the computation of cash payments for product purchases for June and July.
5. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.

Answer 1

1		Cash collections of credit sales
					April	May	June	July
	Unit sales			a	7500	3000	6500	6000
	Selling price			b	160	160	160	160
	Sales revenue			c=a*b	1200000	480000	1040000	960000
	Collection:
	24% in the month of sale			d=c*24%			249600	230400
	46% in the month after the sale			e			220800	478400
							(480000*46%)	(1040000*46%)
	25% in the second month after the sale			f			300000	120000
							(1200000*25%)	(480000*25%)
	Total collections			d+e+f			770400	828800
2		Budgeted ending inventories (in units)
					April	May	June	July	August
	Unit sales				7500	3000	6500	6000	4200
	Budgeted ending inventory				635	1300	1205	863
	(19% of next month sales+65)				(3000*19%)+65	(6500*19%)+65	(6000*19%)+65	(4200*19%)+65
3	Merchandise purchase budget:
						May	June	July
	Unit sales					3000	6500	6000
	Add: Budgeted ending inventory					1300	1205	863
						4300	7705	6863
	Less: beginning inventory					635	1300	1205
	Units to be purchased				a	3665	6405	5658
	Purchase price				b	110	110	110
	Total purchase cost				a*b	403150	704550	622380
4		Schedule of cash payments
							June	July
	Total purchase cost					a	704550	622380
	Payment:
	60% in the month of purchase					a*60%	422730	373428
	40% im the next month						161260	281820
							(403150*40%)	(704550*40%)
	Total payment						583990	655248