Question

Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company’s budgeting practices have been inferior, and, at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favourable impression on the president and have assembled the information below.

The necklaces are sold to retailers for $10 each. Recent and forecasted sales in units are as follows:

January (actual)	23,000	June	56,000
February (actual)	32,000	July	36,000
March (actual)	45,000	August	34,000
April	71,000	September	31,000
May	105,000

The large buildup in sales before and during May is due to Mother’s Day. Ending inventories should be equal to 40% of the next month’s sales in units.

The necklaces cost the company $4 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales are collected by month-end. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

The company’s monthly selling and administrative expenses are given below:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	218,000
Rent		21,000
Wages and salaries		113,200
Utilities		9,400
Insurance		4,200
Depreciation		20,000

All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $18,400 in new equipment during May and $46,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $16,200 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:

Assets
Cash	$	80,000
Accounts receivable ($32,000 February sales;      $360,000 March sales)		392,000
Inventory		113,600
Prepaid insurance		29,400
Fixed assets, net of depreciation		980,000
Total assets	$	1,595,000
Liabilities and Shareholders’ Equity
Accounts payable	$	110,800
Dividends payable		16,200
Common shares		860,000
Retained earnings		608,000
Total liabilities and shareholders’ equity	$	1,595,000

The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
1.

a.	A sales budget by month and in total.

              

b.	A schedule of expected cash collections from sales, by month and in total.

              

c.	A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

              

d.	A schedule of expected cash disbursements for merchandise purchases, by month and in total.

              

e.	A cash budget. Show the budget by month and in total. (Round your intermediate calculations and final answers to the nearest whole dollar. Also, round down your interest calculations to the next whole dollar amount. Cash deficiency, repayments and interest should be indicated by a minus sign.)

       

f.	A budgeted income statement for the three-month period ending June 30. Use the variable costing approach.

       

g.	A budgeted balance sheet as of June 30.

       

Answer 1

a) Sales Budget
	April	May	June	Quarter
Budgeted Unit Sales	71,000	105,000	56,000	232,000
Selling Price per unit	$10	$10	$10	$10
Total Sales	$710,000	$1,050,000	$560,000	$2,320,000
b)
1b. A schedule of expected cash collections from sales, by month and in total
	April	May	June	,Quarter
February sales = 32000 x $10 x 10%	$32,000			$32,000
March sales = 45,200 x $10 x 70%; 45200 x $10 x 10%	$315,000	$45,000		$360,000
April sales 71000 x 10 x 20%; 70% ;10%	$142,000	$497,000	$71,000	$710,000
May sales 105,000 x 10 x 20%;70% ;		$210,000	$735,000	$945,000
June sales 56,000 x $10 x 10%			$56,000	$56,000
Total Cash Sales	$489,000	$752,000	$862,000	$2,103,000
1c. A merchandise purchases budget in units and in dollars. Show the budget by month and in toal
	April	May	June	Quarter
Budgeted unit sales	71,000	105,000	56,000	232,000
Add: Desired Ending Inventory 40% x (may , june, july rspectively)	42,000	22,400	14,400	14,400
Total needs	113,000	127,400	70,400	310,800
Less: Brginning Inventory	28,400	42,000	22,400	28,400
Required purchases	84,600	85,400	48,000	218,000
Unit Cost	$4	$4	$4	$4
Required $ purchases	$338,400	$341,600	$192,000	$872,000
1d. A schedule of expected cash dibursements for merchandise purchases, by month in total
	April	May	June	Quarter
Accts. payable	$110,800			$110,800
April purchases	$169,200	$169,200		$338,400
May purchases		$170,800	$170,800	$341,600
June purchases			$96,000	$96,000
Total cash payments	$280,000	$169,200	$170,800	$886,800