Question

Question

Kankee unlimited, a nationwide distributer of low-cost limitation 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 eager to make a favorable impression on the president and have assembled the information below.
The necklaces are sold to retailers for $10 each. Recent and forecast sales in units are as follows;
January (actual) ............20,000
February (actual)............26,000
March (actual)..............40,000
April ..............................65,000
May...............................100,000
June .............................50,000
July ..............................30,000
August .........................28,000
September ..................25,000
The Large build up in sales before and during may is due to mother's Day. Ending inventories should be equal to 40% of the next months sales in units. The necklaces cost the company $4 each.purchase era paid for as follows: 50% in the month of purchase and 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 months 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 companys monthly selling and adiminstrative expense are given bellow;
Variable;
Sales commission .........4% of sales
Fixed;
Advertising .........$200,000
Rent............18,000
Wages and salaries ......106,000
Utilites...........7,000
Insuranse ........3,000
Depreciation .......14,000
All selling and Administrative expenses are paid During the month, in cash with the exception of depreciation and insurance. Insurance has paid on the annual basis in November of each year . The company plans to purchase $16,000 in new equipment during may and $40,000 in in new equipment during June ; both purchase will be paid in cash.
The company declares divideds of $15,000 each quarter , payable in the first month of the following quarter . The company balance sheet at march 31 is given below :
Assets
Cash............$74,000
Accounts receivable ($26,000 February sales; $320,000 march sales)..........346,000
Inventory .............104,000
Prepaid insurance ........21,000
Fixed assets, net of depreciation .......950,000
Total assets ................$1,495,000
Liabilities and shareholders, Equity
Account payable ..........$100,000
Dividends payable .........15,000
Common shares ............800,000
Retained earning.............580,000
Total liabilities and shareholders equity....$1,495,000
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 tht following detailed budgets;
1.A .A sales budget by month and in total.
B. A schedule of expected cash collection from sales, by month and in total.
C. A merchandise purchase budget in units and in dollars. Show the budget by month and in total.
D. S schedule of expected cash disbursement for merchandise purchase , by in month and in total.
2. A cash budgets. Show the budget by in month and in total.
3. A budgeted income statement for the three-month period ending june 30.use the variable costing approach .
4. A budgeted balance sheet as of june 30.

Answer 1

1. A. Sales Budget:
April: 65,000 units x $10 = $650,000
May: 100,000 units x $10 = $1,000,000
June: 50,000 units x $10 = $500,000
Total: $2,150,000

B. Schedule of Expected Cash Collection from Sales:
April Sales: $650,000 x 20% = $130,000
May Sales: $1,000,000 x 20% = $200,000
June Sales: $500,000 x 20% = $100,000

Total Cash Collection: $430,000

C. Merchandise Purchase Budget:
Ending Inventory:
May: 100,000 units x 40% = 40,000 units
June: 50,000 units x 40% = 20,000 units

Purchase Requirements:
April: (65,000 + 40,000) - 104,000 = 1,000 units
May: (100,000 + 20,000) - 40,000 = 80,000 units
June: (50,000 + 0) - 20,000 = 30,000 units

D. Schedule of Expected Cash Disbursement for Merchandise Purchase:
April Purchases: $500,000 x 50% = $250,000
May Purchases: $800,000 x 50% = $400,000
June Purchases: $500,000 x 50% = $250,000

2. Cash Budget:
Beginning Cash Balance: $74,000
Total Cash Collections: $430,000
Total Cash Disbursements: $900,000
Ending Cash Balance: $74,000 + $430,000 - $900,000 = $(396,000) (need borrowing)

3. Budgeted Income Statement:
Sales Revenue: $2,150,000 (from sales budget)
Cost of Goods Sold: $1,060,000 ($4 x 250,000 units)
Gross Profit: $1,090,000
Selling and Administrative Expenses: $348,000
Net Income: $742,000

4. Budgeted Balance Sheet:
Assets:
Cash: $(396,000)
Accounts Receivable: $346,000
Inventory: $104,000
Prepaid Insurance: $21,000
Fixed Assets: $950,000
Total Assets: $1,025,000

Liabilities and Shareholders' Equity:
Accounts Payable: $350,000
Dividends Payable: $15,000
Common Shares: $800,000
Retained Earnings: $(-)140,000
Total Liabilities and Shareholders' Equity: $1,025,000