Question

1. Prepare a sales budget for January through May. The selling price per unit is $40.00. The budgeted sales for December is $30,000. January is $50,000. February is 60,000. March is $60,000. And April is $70,000.

2. Prepare a purchases budget for January through March, and the first quarter in total. Assume that the company only sells one product that can be purchased at $25.00 per unit. The market for this product is very competitive and customers highly value service such as quality and on time delivery of the product. Also assume that currently it is company policy that ending inventory should equal 50% of next month’s projected sales.

3. Prepare a cash budget for January through March and for the first quarter in total. The company maintains a minimum cash balance of $50,000.00, and this was the balance in the cash account on January 1. Past experience shows that 30% of sales are collected in the month of the sale, and 70% in the month following the sale. Labor cost is $15 per unit. Other expenses include $35,000 per month for rent, $14,000 for advertising, and $16,000 per month for depreciation. All costs are paid in the current month except inventory purchases, which are paid in the month following purchase (i.e. January purchases are paid in February). The company has an open line of credit with a bank and can borrow at an annual rate of 12%. For simplification assume that all loans are made at the beginning of the month and repayments are made at the end, and interest is only paid at the time when repayment is made. Additionally, all loans and repayments (not the interest portion) can only be made in increments of $1000 and the company would like to pay its debts, or a portion thereof, as soon as it has enough cash to do so.

4. Finally, prepare the Budgeted Income Statement based on the information given above.

5. Repeat steps 2-4 for budget scenarios B and C using the following Desired ending inventory assumptions: B. 90% Ending Inventory and C. 5% Ending inventory.

Answer 1

1

Sales Budget	December	January	February	March	April	Total
Sales in Units	30000	50000	60000	60000	70000	270000
Selling Price per unit	40	40	40	40	40
Total Sales (Units x Price)	1200000	2000000	2400000	2400000	2800000	10800000

2.

Purchase Budget	January	February	March	Quarter Total
Sale Units (from above sales budget)	50000	60000	60000	170000
Add: Desired Ending Inventory (50% of next month sales)	30000	30000	35000	95000
Total Required	80000	90000	95000	265000
Less: Opening Inventory	25000	30000	30000	85000
Purchases	55000	60000	65000	180000
Purchase cost($)	25	25	25	25
Total Purchase cost	1375000	1500000	1625000	4500000

3.

Cash Budget	January	February	March	Quarter
Beginning Balance	50000	50000	50000	50000
Collection from sales
30% in the month of sale	600000	720000	720000	2040000
70% in the following month	840000	1400000	1680000	3920000
Total Collection	1490000	2170000	2450000	6010000
Less: Payments
Labor Cost	750000	900000	900000	2550000
Rent	35000	35000	35000	105000
Advertising	14000	14000	14000	42000
Purchases ( Paid in the next month)	1000000	1375000	1500000	3875000
Total Payments	1799000	2324000	2449000	6572000
(1)Ending cash balance before financing	-309000	-154000	1000	-562000
Minimum cash balance desired	50000	50000	50000	50000
Cash excess(deficiency)	-359000	-204000	-49000	-612000
Financing
Plus: New Borrowings	359000	204000	49000	612000
Less: Debt repayments
Less: Interest payments
(2)Total Effects of financing	359000	204000	49000	612000
Ending cash balance(1+2)	50000	50000	50000	50000

4.

Budgted Income Statement	Quarter Total ( Scenario A)
Sales (January + February + March)	$68,00,000.00
Less:
Purchases	$45,00,000.00
Labor	$25,50,000.00
Rent	$1,05,000.00
Advertising	$42,000.00
Depreciation	$48,000.00
Operating Income	-$4,45,000.00
Interest expenses	$15,340.00
Net Income	-$4,60,340.00
Interest	=(359000*1%*3)+(204000*1%*2)+(49000*1%*1)=15340

5. Scenario B

Purchase Budget	January	February	March	Quarter Total
Sale Units (from above sales budget)	50000	60000	60000	170000
Add: Desired Ending Inventory (90% of next month sales)	54000	54000	63000	171000
Total Required	104000	114000	123000	341000
Less: Opening Inventory	45000	54000	54000	153000
Purchases	59000	60000	69000	188000
Purchase cost($)	25	25	25	25
Total Purchase cost	1475000	1500000	1725000	4700000
Cash Budget	January	February	March	Quarter
Beginning Balance	50000	50000	50000	50000
Collection from sales
30% in the month of sale	600000	720000	720000	2040000
70% in the following month	840000	1400000	1680000	3920000
Total Collection	1490000	2170000	2450000	6010000
Less: Payments
Labor Cost	750000	900000	900000	2550000
Rent	35000	35000	35000	105000
Advertising	14000	14000	14000	42000
Purchases ( Paid in the next month)	1000000	1475000	1500000	3975000
Total Payments	1799000	2424000	2449000	6672000
(1)Ending cash balance before financing	-309000	-254000	1000	-662000
Minimum cash balance desired	50000	50000	50000	50000
Cash excess(deficiency)	-359000	-304000	-49000	-712000
Financing
Plus: New Borrowings	359000	304000	49000	712000
Less: Debt repayments
Less: Interest payments
(2)Total Effects of financing	359000	304000	49000	712000
Ending cash balance(1+2)	50000	50000	50000	50000

Budgted Income Statement	Quarter Total
Sales (January + February + March)	$68,00,000.00
Less:
Purchases	$47,00,000.00
Labor	$25,50,000.00
Rent	$1,05,000.00
Advertising	$42,000.00
Depreciation	$48,000.00
Operating Income	-$6,45,000.00
Interest expenses	$17,340.00
Net Income	-$6,62,340.00
Interest	=(359000*1%*3)+(304000*1%*2)+(49000*1%*1)=$17340

Scenario 3

Purchase Budget	January	February	March	Quarter Total
Sale Units (from above sales budget)	50000	60000	60000	170000
Add: Desired Ending Inventory (5% of next month sales)	3000	3000	3500	9500
Total Required	53000	63000	63500	179500
Less: Opening Inventory	2500	3000	3000	8500
Purchases	50500	60000	60500	171000
Purchase cost($)	25	25	25	25
Total Purchase cost	1262500	1500000	1512500	4275000
Cash Budget	January	February	March	Quarter
Beginning Balance	50000	50000	50000	50000
Collection from sales
30% in the month of sale	600000	720000	720000	2040000
70% in the following month	840000	1400000	1680000	3920000
Total Collection	1490000	2170000	2450000	6010000
Less: Payments
Labor Cost	750000	900000	900000	2550000
Rent	35000	35000	35000	105000
Advertising	14000	14000	14000	42000
Purchases ( Paid in the next month)	1000000	1262500	1500000	3762500
Total Payments	1799000	2211500	2449000	6459500
(1)Ending cash balance before financing	-309000	-41500	1000	-449500
Minimum cash balance desired	50000	50000	50000	50000
Cash excess(deficiency)	-359000	-91500	-49000	-499500
Financing
Plus: New Borrowings	359000	91500	49000	499500
Less: Debt repayments
Less: Interest payments
(2)Total Effects of financing	359000	91500	49000	499500
Ending cash balance(1+2)	50000	50000	50000	50000

Budgted Income Statement	Quarter Total
Sales (January + February + March)	$68,00,000.00
Less:
Purchases	$42,75,000.00
Labor	$25,50,000.00
Rent	$1,05,000.00
Advertising	$42,000.00
Depreciation	$48,000.00
Operating Income	-$2,20,000.00
Interest expenses	$13,090.00
Net Income	-$2,33,090.00
Interest	=(359000*1%*3)+(91500*1%*2)+(49000*1%*1) =$13090