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COURSE PROJECT 1 INSTRUCTIONS
You have just been contracted as a
budget consultant by LBJ Company, a distributor of bracelets to various retail
outlets across the country. The company has done very little in the way of
budgeting and at certain times of the year has experienced a shortage of cash.
You have decided to prepare a cash
budget for the upcoming fourth quarter in order to show management the benefits
that can be gained from proper cash planning.You have worked with accounting
and other areas to gather the information assembled below.
The company sells many styles of
bracelets, but all are sold for the same $10 price. Actual sales of bracelets
for the last three months and budgeted sales for the next six months follow:
|
July (actual)
|
20,000
|
|
August (actual)
|
26,000
|
|
September (actual)
|
40,000
|
|
October (budget)
|
70,000
|
|
November (budget)
|
110,000
|
|
December (budget)
|
60,000
|
|
January (budget)
|
30,000
|
|
February (budget)
|
28,000
|
|
March (budget)
|
25,000
|
The concentration of sales in the
fourth quarteris due to the Christmas holiday. Sufficient inventory should be
on hand at the end of each month to supply 40% of the bracelets sold in the
following month.
Suppliers are paid $4 for each
bracelet. Fifty-percent of a month’s purchases is paid for in the month of
purchase; the other 50% is paid for in the following month. All sales are on
credit with no discounts. The company has found, however, that only 20% of a
month’s sales are collected in the month of sale. 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.
Monthly operating expenses for the
company are given below:
Variable expenses:
Sales
commissions
4% of sales
Fixed expenses:
Advertising
$220,000
Rent
$20,000
Salaries
$110,000
Utilities
$10,000
Insurance
$5,000
Depreciation
$18,000
Insurance is paid on an annual
basis, in January of each year.
The company plans to purchase
$22,000 in new equipment during October and $50,000 in new equipment during November;
both purchases will be for cash. The company declares dividends of $20,000 each
quarter, payable in the first month of the following quarter.
Other relevant data is given below:
Cash balance as of September 30
$74,000
Inventory balance as of September
30
$112,000
Merchandise purchases for
September
$200,000
The company maintains a minimum cash
balance of at least $50,000 at the end of each month. All borrowing is done at
the beginning of a month; any repayments are made at the end of a month.
The company has an agreement with a
bank that allows the company to borrow the exact amount needed 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 will pay the bank all of the accrued interest on the loan
and as much of the loan as possible while still retaining at least $50,000 in
cash.
Required:
Prepare a cash budget for the
three-month period ending December 31. 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 dollars. Show the budget by month and in total.
- d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
- A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.
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