Case (1)

You have just been hired as a management trainee by Fabrics Company, a nationwide distributer of a designers silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. 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 favorable impression on the president and have assembled the information below: The company desires a minimum ending cash balance each month of 10,000. The ties are sold to retailers for 8 each. Recent and forecasted sales in units are as follows: January (actual) February (actual) March (actual) April May June July August September 25,000 24,000 28,000 35,000 45,000 60,000 40,000 36,000 32,000

The large buildup in sales before and during June is due to Fathers day. Ending inventories are supposed to equal 90% of the next months sales in units. The ties cost the company 5 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 25% of a months sales are collected by month-end. An additional

50% is collected in the following month, and the remaining 25% is collected in the second month following sale. Bad debts have been negligible. The companys monthly selling and administrative expenses are given below: Variable: Sales commissions Fixed: Wages and salaries Utilities Insurance Depreciation Miscellaneous 1 per tie 22,000 14,000 1,200 1,500 3,000

All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Land will be purchased during May for 25,000 cash. The company declares dividends of 12,000 each quarter, payable in the first month of the following quarter. The companys balance sheet at March 31 is given below: Assets Cash Accounts receivable (48000 February sales; 168000 March sales) Inventory (31500 units) Prepaid insurance Fixed assets, net of depreciation Total assets Liabilities and stockholders equity Accounts payable Dividends payable Capital stock Retained earnings Total liabilities and stockholders equity 14000 216000 157500 14400 172700 574600 85750 12000 300000 176850 574600

The company has an agreement with a bank that allows it to borrow in increments of 1000 at the beginning of each month, up to a total loan

balance of 40000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of 1000), while still remaining at least 10000 in cash. 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 pounds. Show the budget by month and in total. d. a schedule of expected cash disbursements for merchandise purchases, by month and in total. 2. a cash budget. Show the budget by month and in total.