Question :
You have just been hired as a management trainee by Cravat Sales Company, a countrywide distributor of a designer's silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so quickly over the last few years that it has become essential to add new members to the management team. You have been given responsibility for all budgeting and planning. Your first assignment is to arrange a master budget for the next three months, starting April 1. You are anxious to make a positive impression on the president and have assembled the information given below.
The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each. Forecasted and Recent sales in units are as follows:
January (actual) 22,000 June 67,000
February (actual) 33,000 July 46,000
March (actual) 37,000 August 37,000
April 41,000 September 34,000
May 51,000
The large buildup in sales before and during June is due to Father's Day. Ending inventories are supposed to equivalent 90% of the next month's 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 subsequent month. All sales are on credit, with no discount, and payable within 15 days. The company has found, thus, that only 25% of a month's sales are collected by month-end. An additional 50% is collected in the provided month, and the outstanding 25% is collected in the second month subsequent sale. Bad debts have been negligible.
The company's monthly selling and administrative expenses are given below:
Variable:
Sales commissions $ 1 per tie
Fixed:
Wages and salaries $ 23,500
Utilities $ 15,300
Insurance $ 1,200
Depreciation $ 1,500
Miscellaneous $ 3,100
All selling and administrative expenses are paid in the current month, in cash, with the exception of depreciation and insurance expired. Land can be purchased during May for $26,000 cash. The company declares dividends of $9,000 each quarter, payable in the 1st month of the subsequent quarter. The company's balance sheet at March 31 is provided below:
Assets
Cash $ 19,000
Accounts receivable ($66,000 February sales; $222,000 March sales) 288,000
Inventory (36,900 units) 184,500
Prepaid insurance 14,400
Fixed assets, net of depreciation 82,500
Total assets $ 588,400
Liabilities and Stockholders' Equity
Accounts payable $101,500
Dividends payable 9,000
Capital stock 300,000
Retained earnings 177,900
Total liabilities and stockholders' equity $ 588,400
The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the starting of each month, up to a total loan balance of $90,000. The interest rate on loans is 1% per month, and for ease, we will consider that interest is not compounded. At the end of the quarter, the company could pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $10,000 in cash.