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Cravat Sales Company, a nationwide distributor of a designer’s silk ties with an exclusive franchise on the distribution of the ties, and sales have grown rapidly over the last few years. Your have been given responsibility for all planning and budgeting. Your assignment is to prepare a master budget for the next 3 months, starting April 1st. You are anxious to make a favorable impression on the president and have assembled the information below.
The ties are sold to retailers for $8 each. Recent and forecasted sales in units are as follows: 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.
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.
Sales commissions (per unit)$1.00
All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Land will be purchased during May for ,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:
The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $40,000. 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.
Prepare a master budget for the three-month period ending June 30, including:
The Cravat Sales Company was expected to spend $195,750, $256,250, and $251,250 in cash for purchasing of merchandises in April, May, and June respectively. Totally, it would spend $703,250 within the 2nd quarter.
In the first attempt to forecast the cash funding, we found that the company could not borrow less than $40,000 per month as agreed with the bank while maintaining the minimum ending cash balance of $10,000 at the same time. If comply only the borrowing limit, it would keep marginal cash of $2,250 in hands by end of April and suffer severe cash shortage of $37,000 by the end of May.
Master Budgeting at Cravat Sales Company. (2016, Jun 12). Retrieved from https://studymoose.com/master-budgeting-at-cravat-sales-company-essay
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