COURSE PROJECT 1 INSTRUCTIONS

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 quarter is 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.
2. 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.