Case 08-29_CRAVAT SALES COMPANY_Budgets

You have just been hired as a management trainee by a company selling cameras. The company has an exclusive franchise on the distribution of the cameras, 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 cameras are sold to retailers for $8 each. Recent and forecasted sales in units are as follows:
January (actual) . . . . . . . . . . . . . . . 20,000
February (actual) . . . . . . . . . . . . . . 24,000
March (actual) . . . . . . . . . . . . . . . . 28,000
April . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
May . . . . . . . . . . . . . . . . . . . . . . . . 45,000
June . . . . . . . . . . . . . . . . . 60,000
July . . . . . . . . . . . . . . . . . . 40,000
August . . . . . . . . . . . . . . . 36,000
September . . . . . . . . . . . . 32,000
382 Chapter 8
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 cameras 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 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 company’s monthly selling and administrative expenses are given below:
Variable:
Sales commissions . . . . . . $1 per camera
Fixed:
Wages and salaries . . . . . . $22,000
Utilicameras . . . . . . . . . . . . . . . $14,000
Insurance . . . . . . . . . . . . . $1,200
Depreciation . . . . . . . . . . . $1,500
Miscellaneous . . . . . . . . . . $3,000

All operating expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Fixed assets 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 company’s balance sheet at March 31 is given below:
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,000
Accounts receivable ($48,000 February sales;
$168,000 March sales) . . . . . . . . . . . . . . . . . . . . . . 216,000
Inventory (31,500 units) . . . . . . . . . . . . . . . . . . . . . . . 157,500
Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400
Fixed assets, net of depreciation . . . . . . . . . . . . . . . . 172,700
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $574,600

Liabilities and Stockholders’ Equity
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,750
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,850
Total liabilities and stockholders’ equity . . . . . . . . . . . $574,600

The company can borrow money from its bank at 12% annual interest. All borrowing must be done at the beginning of the month, and repayments must be made at the end of the month. Repayments of principal must be in round $1,000 amounts. Borrowing (and payment of interest) can be in any amount. Interest is computed and paid at the end of each quarter on all loans outstanding during the quarter. Round all interest payments to the nearest whole dollar. Compute interest on whole months (1/12, 2/12 and so on). The company wishes to use any excess cash to pay off loans as rapidly as possible.

1. Prepare the following budgets for the three months, starting April 1
a. Sales
b. Cash Collection
c. Purchases
d. Budgeted cash payments for purchases
e. Cash Budget
2. Prepare a budgeted income statement for each month for the next three months. Include a common size income statement for the budgeted numbers.