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The company sells many styles of earrings, but all are sold for the same price - $10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow:
|
January (actual) |
20,000 |
|
February (actual) |
26,000 |
|
March (actual) |
40,000 |
|
April (budget) |
65,000 |
|
May (budget) |
100,000 |
|
June (budget) |
50,000 |
|
July (budget) |
30,000 |
|
August (budget) |
28,000 |
|
September (budget) |
25,000 |
The concentration of sales before and during May is due to Mother’s Day. 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. One-half of a month's purchases is paid for in the month of purchase; the other half 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.
Monthly operating expenses for the company are given below:
Variable expenses:
Sales commissions 4% of sales
Fixed expenses:
Advertising $200,000
Rent $18,000
Salaries $106,000
Utilities $ 7,000
Insurance $3,000
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 for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.
Other relevant data is given below:
Cash balance as of March 31 $74,000
Inventory balance as of March 31 $104,000
Merchandise purchases for March $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
I've performed the other budgets but i am having an issue creating the cash budget for this question.
- 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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