Question

The beauty behind excel is that managers can perform what-if analysis just by changing the data, so you do not need to retype the budgets if you have used cell references and formulas throughout.

Data Scenario: You have just been hired into a management position which requires the application of your budgeting skills. You find out that budgeting has not been a priority of the company and that they have been experiencing cash shortages. You have contacted various areas on the organization and have accumulated the information below to assist you in preparing a comprehensive budget.                                                                                                                              

The following is actual information that relates to the operations of a merchandiser named Sled Company, a wholesaler of sleds as of March 31.          Cash $1,000 Accounts receivable 13,680 Inventory 10,757 Accounts Payable $15,781

                                                                                               

Actual and Budgeted sales dollar Data-Sales Budget: March (actual) $38,000 April $36,000 May $37,000 June $39,000 July $35,000                                                                                      

                                                                                                                               

Sales are the following type: 64% Cash sales collected in month of sale 36% Credit sales collected in the following month of sale    Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales. Cost of goods sold equals    83%       of sales price                                                                     

At the end of each month, inventory is to be on hand(ending inventory) equal to 36% of following month's sales needs, stated at cost. Inventory purchases are paid 49% in month of purchase 51% in month after purchase. The accounts payable at March 31 is a result of March purchases of inventory. I have set up a calculation on the budget worksheet to show you this calculation.                                                                                                                      

Monthly selling expenses are as follows and are paid in the month incurred if it is a cash expense. Salaries and wages 8% of sales dollar Commissions 3% of sales dollar Advertising      $900     per month Utilities          $200 per month                                                                               

                                                                                                                               

Monthly general and administrative expenses are as follows and are paid in the month incurred if it is a cash expense. Rent $2,000 per month Depreciation $500 for month                                                                     

                                                                                                                               

Required: You must use cell references on the BudgetSolution worksheet, by referencing this worksheet that contains the data.              Prepare the following second quarter budgets and answer the questions listed on the template provided on the BudgetSolution Worksheet. I have adapted the budget model to meet the needs of this company. If I bolded a line item, that is a header and does not need computation on that row. Please note the quarter column is for the quarter so not all lines should be added across in the quarter column. When you have beginning and ending inventory or cash balances this is for the quarter and should be brought over to the quarter column.                                                                                                                                                                                                                                                                                                                        

7. Prepare a budgeted income statement for the quarter ending June 30, 20XX. You do not need to show monthly columns.              I entered Sales for you on the income statement

                                                               

8. What do you think about the survivability of this business?                                                                                                                    

9. What if the company finds out the monthly rent will increase to $2,500, what budgets are effected? Why? What is the New Net income(Loss) for the quarter?                                                                                                                         

If you have linked everything correctly, you should only have to change the monthly rent on this sheet to determine your answer to the questions asked. Please change the rent back to the original amount of 2,000 before you submit.               

Answer 1

7.

Sled Company Budgeted Income Statement For the quarter ended June 30, 20XX
Sales revenue $ ( 36,000 + 37,000 + 39,000)		$ 112,000
Cost of Goods Sold ( $ 112,000 x 83 %)		92,960
Gross Profit		19,040
Selling and Administrative Expenses
Sales Commission Expense ( $ 112,000 x 3 %)	$ 3,360
Advertising Expense ( $ 900 x 3)	2,700
Salaries and Wages Expense ( $ 112,000 x 8%)	8,960
Utilities Expense ( $ 200 x 3)	600
Rent ( $ 2,000 x 3)	6,000
Depreciation ( $ 500 x 3)	1,500
Total Selling and Administrative Expenses		23,120
Net operating income ( loss)		$ (4,080)

8. At the current sales volume, the company is unable to earn a net operating income. Cost of goods sold accounts for 83% of sales revenue, and salaries and wages and sales commision accounts for another 11 %. Hence contribution margin ratio is only 6 %. That is not enough to absorb fixed costs, let alone earning profit.

Therefore, unless the company can substantially increase its selling price, the survivability of the business is very doubtful. Increasing the sales volume can also help improving the sustainability, provided the fixed expenses do not change.

9. Increase in monthly rent would impact the General and Administrative Expense Budget. The new net loss for the quarter would be $ 5,580.