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 of the previous year    10,000

January                                     70,000

February                                    30,000

March                                        50,000

April                                          80,000

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.

Label the budgets prepared in Steps 1-4 as budget scenario A.

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

	Ending Inventory
B.	90%
C.	5%

6. Write a brief analysis of the three inventory policies depicted in the budget scenarios A, B and C and recommend a policy that the company should implement. Give reasons for your recommendation. Your write-up should be based on the results you obtained from the analyses in steps 1-5 above. Assume that you are writing on behalf of a professional consultant advising the President of the company about the company’s inventory policies. Your write-up should be in the form of a one-page Memo to the President of the company. Organization, grammar, and spelling are important.

Answer 1

Solution:

1.

Sales Budget
	January	February	March	Total
Sales (units)	70000	30000	50000	150000
Selling Price per unit	$                50.00	$                50.00	$                50.00	$                50.00
Sale Revenue	$ 35,00,000.00	$ 15,00,000.00	$ 25,00,000.00	$ 75,00,000.00

2.

Purchases Budget
	January	February	March	Total
Sales	70000	30000	50000	150000
Add: Ending Inventory ( 45% of next months Sale)	13500	22500	36000	72000
	83500	52500	86000	222000
Less: Opening Inventory ( 45% of Current Months Sale)	31500	13500	22500	67500
Purchases	52000	39000	63500	154500
Purchase price per unit	$                35.00	$                35.00	$                35.00	$                35.00
Total Purchases	$ 18,20,000.00	$ 13,65,000.00	$ 22,22,500.00	$ 54,07,500.00

Notes:

	January	February	March
Ending Inventory	=45%*30000	=45%*50000	=45%*80000
Opening Inventory	=45%*70000	=45%*30000	=45%*50000

PS: Dear student, please keep one question per post. First two is done for you. Hope this helps. For any clarifications kindly use the comment box