Question

Davis Dry Goods distributes silk ties. You are in charge of creating Davis' master budget for the upcoming second quarter, April - June 2018. Davis 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: 22,000 June 33,000 July 37,000 August 41,000 September 51,000 67,000 January (actual) February (actual) March (actual) April May 46,000 37,000 34,000 The large buildup in sales before and during June is due to Father's Day. Ending inventories are supposed to equal 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 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 month's sales are collected by month-end. An additional 75% is collected in the following month. Bad debts have been negligible. The company's monthly selling and administrative expenses are given below: Variable: Sales commissions Fixed: S1 per tie $ 23,500 $ 15,300 S 1,200 S 1,500 S 3,100 Wages and salaries Utilities Insurance Depreciation Miscellaneous All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Davis has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month. 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 $1,000), while still retaining at least $10,000 in cash.

Answer 1

Calculation April May June Davis Dry Goods Sales Budget Req 1A Sales in Units Selling price per unit Total budgeted sales April 41,000 May 51,000 June 67,000 Quarter 159,000 328,000 408,000 536,000 1,272,000 Calculation April May June May June Schedule of expected cash collections Req 1B Accounts Receivable April sales May sales June sales Total cash collections April 222,000 82,000 =328,000*25% 246,000 102,000 Quarter 222,000 328,000 408,000 134,000 1,092,000 =328,000*75% =408,000*25% 306,000 134,000 440,000 -408,000*75% =536,000*25% 304,000 348,000 April May June -51,000*90% =67,000*90% =46,000*90% Merchandise Purchases budget Req 1C Budgeted Cost of goods sold Add Desired Ending Inventory Inventory Needed Less Beginning Inventory Required Purchases Cost per unit Required Dollar Purchases April 41,000 45,900 86,900 36,900 50,000 May 51,000 60,300 111,300 45,900 65,400 June 67,000 41,400 108,400 60,300 48,100 Quarter 159,000 41,400 200,400 36,900 163,500 -41,000*90% End Inv of April End Inv of May 250,000 327,000 240,500 817,500 April April May June Schedule of expected cash disbursements for Merchandise Purchases Req 1D May June Accounts Payable 101,500 April Purchases 125,000 125,000 May Purchases 163,500 163,500 June Purchases 120,250 Total cash disbursements for purchases 226,500 288,500 283,750 =250,000*50% Quarter 101,500 250,000 327,000 120,250 798,750 =250,000*50% =327,000*50% =327,000*50% =240,500*50% April 41,000*1 May =51,000*1 June =67,000*1 Selling & Admin Expenses Budget - for Income Statement Req 1E April May Sales commission 41,000 51,000 Wages and Salaries 23,500 23,500 Utilities 15,300 15,300 Insurance 1,200 1,200 Depreciation 1,500 1,500 Miscellaneous 3,100 3,100 Total Selling & Admin expenses 85,600 95,600 June 67,000 23,500 15,300 1,200 1,500 Quarter 159,000 70,500 45,900 3,600 4,500 9,300 292,800 3,100 111,600 April May June Schedule of cash payments for S&A Expenses - for Cash Budget Req 1E April May Sales commission 41,000 51,000 Wages and Salaries 23,500 23,500 Utilities 15,300 15,300 Insurance Depreciation Miscellaneous 3,100 3,100 Total Payments for S&A expenses 82,900 92,900 June 67,000 23,500 15,300 Quarter 159,000 70,500 45,900 3,100 108,900 9,300 284,700

April May June April 19,000 304,000 323,000 May 10,600 348,000 358,600 June 10,200 440,000 450,200 Quarter 19,000 1,092,000 1,111,000 82,900 288,500 92,900 26,000 283,750 108,900 Cash budget Req 1 Cash balance, beginning Add Cash collections Total cash available Less cash payments For Inventory purchases For Selling & Admin expenses Purchase of Land Dividends paid Total budgeted payments Payments minus receipts Financing Borrowings Repayments Interest Total Financing Cash balance, ending 798,750 284,700 26,000 9,000 1,118,450 (7,450) 9,000 318,400 4,600 407,400 (48,800) 392,650 57,550 57,550 6,000 59,000 65,000 =10,000-4,000 =10,000+49,000 (46,000) Round off surplus& deficit of 4,600& 48,800 to 4,000 & 49,000 for borrowings calc (1,360) =(6,000*1%*3)+(59,000*1%*2) 17,640 10,190 6,000 10,600 (1,360) (47,360) 10,190 59,000 10,200

=159,000*5 Income Statement Req2 Sales Cost of goods sold Gross Profit Selling & Admin expenses Operating income Interest expense Net income 1,272,000 795,000 477,000 292,800 184,200 1,360 182,840 Balance Sheet Reg 3 Assets Current Assets Cash Accounts Receivable Inventory Prepaid insurance Total Current Assets Fixed assets, net Total Assets 10,190 402,000 207,000 10,800 =536,000*75% =41,400*5 =14,400-3,600 629,990 170,000 799,990 =148,500+26,000-4,500 120,250 19,000 =240,500*50% =65,000-46,000 139,250 Liabilities Accounts Payable Notes Payable Total Liabilties Equity Capital Stock Retained Earnings Total Equity Total Liabilities & Equity 309,000 351,740 =177,900+182,840-9,000 660,740 799,990