CASE 9-27 - Case Study PDF

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CASE 9–27 Master Budget with Supporting Schedules [LO2] Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company’s budgeting practices have been inferior, and, at times, the company has experienced a cash shortage. 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 favourable impression on the president and have assembled the information below. The necklaces are sold to retailers for $10 each. Recent and forecasted sales in units are as follows:

The large buildup in sales before and during May is due to Mother’s Day. Ending inventories should be equal to 40% of the next month’s sales in units. The necklaces cost the company $4 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 20% of a month’s sales are collected by month-end. 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. The company’s monthly selling and administrative expenses are given below:

All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:

The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month. Required: Prepare a master budget for the three-month period ending June 30. 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. 2. A cash budget. Show the budget by month and in total. 3. A budgeted income statement for the three-month period ending June 30. Use the variable costing approach. 4. A budgeted balance sheet as of June 30.

Case 9-27 (120+ minutes) a.

Sales budget:

April

May

June

Quarter

1 . Budgeted sales in units.............

b.

65,000

Selling price per unit.................

 ×

$10

Total sales................................

$650,000

100,000  ×

$10

$1,000,000

50,000 ×

215,000

$10

$500,000

×

$10

$2,150,000

Schedule of expected cash collections: February sales (10%)................ March sales

$ 26,000

$

26,000

280,000

$ 40,000

320,000

130,000

455,000

$ 65,000

650,000

200,000

700,000

900,000

(70%, 10%).......................... April sales (20%, 70%, 10%)................. May sales (20%, 70%).......................... June sales (20%)...................... Total cash collections................ c.

100,000

100,000

$436,000

$695,000

$865,000

$1,996,000

Budgeted sales in units.............

65,000

100,000

50,000

215,000

Add budgeted ending

40,000

Merchandise purchases budget: 20,000

12,000

12,000

inventory*............................ Total needs...............................

105,000

120,000

Less beginning inventory...........

26,000

40,000

Required unit purchases............

79,000

80,000

Unit cost..................................

×

$4

Required dollar purchases.........

$316,000

*40% of the next month’s sales in units.

d. Budgeted cash disbursements for merchandise purchases:

April

×

$4

$320,000

62,000 20,000

227,000 26,000

42,000

201,000

×

×

$4

$168,000

$4

$ 804,000

May June Quarter

March purchases (Accounts payable).................................................................. $100,000

$ 100,000

April purchases................... 158,000 $158,000 316,000

May purchases.................... 160,000 $160,000 320,000

June purchases...................

84,000 84,000

Total cash disbursements. .. . $258,000 $318,000 $244,000 $ 820,000

Case 9-27 (continued)

2. Knockoffs Unlimited

Cash Budget

For the Three Months Ending June 30

April May June Quarter Cash balance, beginning.................. $ 74,000 $ 50,000 $ 50,000 $  74,000 Add receipts from customers (Part 1 b.)............................................................. 436,000 695,000

865,000 1,996,000 Total cash available......................... 510,000 745,000 915,000 2,070,000 Less disbursements:

Purchase of inventory (Part 1 d.). . 258,000 318,000 244,000 820,000 Advertising.................................. 200,000 200,000 200,000 600,000 Rent........................................... 18,000 18,000 18,000 54,000 Salaries and wages...................... 106,000 106,000 106,000 318,000 Sales commissions (4% of sales).. 26,000 40,000 20,000 86,000 Utilities....................................... 7,000 7,000

7,000 21,000 Dividends paid............................ 15,000 0 0 15,000 Equipment purchases.................. 0 16,000 40,000 56,000 Total disbursements........................ 630,000 705,000 635,000 1,970,000 Excess (deficiency) of receipts over disbursements.............................................. (120,000 ) 40,000 280,000 100,000 Financing:

Borrowings*................................ 171,717 11,835 0 183,552 Repayments................................ 0 0 (183,552) (183,552) Interest**................................... (1,717) (1,835)

(1,835) (5,387) Total financing................................ 170,000 10,000 (185,387) (5,387) Cash balance, ending...................... $  50,000 $  50,000 $  94,613 $  94,613

*April: $(120,000) + X - .01X = $50,000, X = $171,717 (rounded) May: $40,000 + X - .01X - $1,717 = $50,000, X = $11,835 (rounded) **April: $171,717 x .01 = $1,717 May and June: ($171,717 + $11,835) x .01 = $1,835

Case 9-27 (continued) 3.

Knockoffs Unlimited Budgeted Income Statement For the Three Months Ended June 30

Sales revenue (Part 1 a.)............................................

$2,150,000

Variable expenses: Cost of goods sold (215,000 units @ $4 per necklace)......................

$860,000

Commissions (215,000 units @ 4% of sales)............................

86,000

946,000

Contribution margin...................................................

1,204,000

Fixed expenses: Advertising ($200,000 x 3).....................................

600,000

Rent ($18,000 x 3).................................................

54,000

Wages and salaries ($106,000 x 3).........................

318,000

Utilities ($7,000 x 3)...............................................

21,000

Insurance ($3,000 x 3)...........................................

9,000

Depreciation ($14,000 x 3).....................................

42,000

1,044,000

Operating income......................................................

160,000

Less interest expense (Part 2).................................... Net income...............................................................

5,387 $

154,613

Case 9-27 (continued) 4.

Knockoffs Unlimited Budgeted Balance Sheet June 30

Assets Cash (Part 2)...........................................................................................

$ 94,613

Accounts receivable (see below)...............................................................

500,000

Inventory (12,000 units @ $4 per unit).....................................................

48,000

Prepaid insurance ($21,000 – $9,000).......................................................

12,000

Fixed assets, net of depreciation ($950,000 + $56,000 – $42,000)..........................................................

964,000

Total assets.............................................................................................

$1,618,613

Liabilities and Shareholders’ Equity Accounts payable, purchases (50% × $168,000 from Part 1 c.)..........................................................

$ 84,000

Dividends payable....................................................................................

15,000

Common shares......................................................................................

800,000

Retained earnings (see below).................................................................

719,613

Total liabilities and equity.........................................................................

$1,618,613

Accounts receivable at June 30: 10% × May sales of $1,000,000......................................

$100,000

80% × June sales of $500,000........................................

400,000

Total..............................................................................

$500,000

Retained earnings at June 30: Balance, March 31...........................................................

$580,000

Add net income (Part 3)..................................................

154,613

Total..............................................................................

734,613

Less dividends declared...................................................

15,000

Balance, June 30.............................................................

$719,613...