Master Budget Project
You have just been hired as a new management trainee by Quik-Flik Company, a nationwide distributor of a revolutionary new cigarette lighter. The company has an exclusive franchise on distribution of the lighter, 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 direct responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1, 2006. You are anxious to make a favorable impression on the president and have assembled the information below.
The lighters are forecast to sell for $8 each. Recent forecast and/or actual sales in units are:
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January (actual) 20,000
April – 35,000
July – 40,000
February (actual) 24,000
May – 45,000
August – 36,000
March (actual) 28,000
June – 60,000
September – 32,000
All sales are on credit (no cash sales). When preparing the Sales Budget, instead of showing the cash sales, credit sales and total sales, you will be creating a sales budget illustrating the budgeted units, the price per unit and then the total credit sales estimated. Just a reminder, you are only doing three months and then the total for the quarter.
Inventory, Purchases and Cost of Goods Sold:
The large buildup in sales before and during the month of June is due to Father’s Day. The lighters cost the company $5 each. Ending inventories are supposed to equal 90 percent of the next month’s sales in units. Remember, the desired ending inventory value is always expressed in terms of the cost ($5) of the lighters.
The company’s monthly operating expenses are given below:
Sales Commissions ………… $1 per lighter
Wages and salaries…………… 22,000
Insurance expired………………. 1,200
For purposes of completing part 1 – the interest expense from the revised cash budget will be a given.
Interest Expense for the quarter is $3,018.
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 month following, and the remaining 25% is collected in the second month following. Bad debts have been negligible.
Cash payments for purchases:
Purchases are paid for as follows: 50% in the month of the purchase and the remaining 50% in the following month.
Cash payments for operating expenses:
All operating expenses are paid during the month, in cash, with the exception of depreciation and insurance expired.
New 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 desires a minimum ending cash balance each month of $10,000.(If borrowing is required, borrow just enough to get to an ending cash balance of $10,000 and no more.) The company can borrow money from its bank at 12% annual interest. All borrowing must be done at the beginning of a month, and repayments must be made at the end of a month. Repayments of principal must be in round $1,000 amounts. (Principal and interest will not be in $1,000 amounts. Remember when calculating interest on each borrowing to include the month it was borrowed plus the month(s) that balance was outstanding.) 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 forth). The company wishes to use any excess cash to pay loans off as rapidly as possible.
The company’s balance sheet at March 31 is given below:
$48,000 February sales; 25% of the total remains,
$168,000 March sales; 75% of the total remains
Inventory (31,500 units)
Fixed assets, net of depreciation
Liabilities and Stockholders’ Equity:
Accounts payable, (purchases)
Short-term notes payable
Capital stock, no par
Total Liabilities and Stockholders’ Equity
Income taxes are the responsibility of corporate headquarters, so you can ignore tax for budgeting purposes.
You are to complete a master budget for the Quik-Flik Company for the second quarter April – June, 2006 in two parts.
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