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Master Budget (50 points) Tou have just been hired as a new mananement trainee by Hawkins Incorporated, a distributor of designer silk ties to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. To this end, you have worked with accounting and other areas to gather the information assembled below. The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 cach. Actual sales of ties for the last three months and budgeted sales for the next six months follow (in ties...not dollars): January (actual) February (actual) March (actual) April (budget May (budget) 20,000 24,000 28,000 35,000 45,000 June (budget) July (budget) August (budget) September (budget) 60,000 40,000 36,000 32,000 The large buildup in sales before and during June is due to Father's Day. Sufficient inventory should be on hand at the end of each month to equal 90% of the ties sold in the following month The ties cost the company $5 each. One-half (50%) of a month's purchases is paid for in the month of purchase; the other half (50%) is paid for in the following month. 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 in the month of sale. An additional 50% is collected in the following month, and the remaining 25% is collected in the second month following sale. Month operating expenses for the company are given below: S1 per tie Variable: Sales commissions Fixed: Salaries Utilities Insurance Depreciation Miscellaneous $22.000 $14,000 $1,200 $1,500 $3,000 All operating expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in March of each year. Land 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's balance sheet as of March 31 is given below: PAGE 2/10 $14,000 $210,000 Assets Cash Accounts receivable ($48.000 from the February sales and $168,000 from the March sales) Inventory (31,500 ties $8 a tie) Prepaid insurance Property and equipment (net of depreciation) $157,500 $14,400 $172.700 Total Assets $574,600 Account payable Dividends payable Common stock Retained earnings Liabilities and Stockholders' Equity $85,750 $12,000 300.000 S176.850 Total liabilities and stockholders' equity S574,600 The company maintains a minimum cash balance of $10,000. All borrowing is done at the beginning of a month; any repayments are made at the end of the month. The company has an agreement with a bank that allows the company to borrow in increments of $1,000 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 would pay the bank all accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while retaining at least $10,000 in cash. 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. b. A schedule of cash collections from sales by month. c. A merchandise purchases budget in units and in dollars by month. d. A schedule of expected cash disbursements for merchandise purchases by month 2. A cash budget by month. Determine any borrowing that would be needed to maintain the minimum cash balance of $10,000. 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. 4. A budgeted balance sheet as of June 30. Templates are provided for you on the next pages. PAGE 3/10 Master Budget Templates 1.a. Sales Budget: April May June Budgeted unit sales Selling price per unit Total sales 1.b. Schedule of expected cash collections: April May June February sales March sales April sales May sales June sales PAGE 4/10 Total cash collections What would be the Accounts Receivable at June 30th? 1.c. Merchandise purchases budget: April May June Budgeted unit sales Add desired ending inventory Total needs Less beginning inventory Total puchases in units Cost of purchases @ $5 per unit 1.d. Budgeted cash disbursements for merchandise purchases: April May June Accounts payable April purchases May purchases June purchases Total cash payments What would be the Accounts Payable at June 30th? PAGE 5/10 2. Cash budget: Hawkins Incorporated Cash Budget For the Three Months Ending June 30 May April June Beginning cash balance Add collections from customers (lb) Total cash available Less cash disbursements: Merchandise purchases (1d) Sales commissions Salaries Utilities Miscellaneous Land purchase Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing Borrowings (Repayments) (Interest)* Total financing Ending cash balance * Interest calculation here: i 01/9 3. Budgeted income statement: Hawkins Incorporated Budgeted Income Statement For the Three Months Ending June 30 Sales (part 1.a.) Variable expenses: Cost of goods sold ($8 * # of ties sold) Commissions ($1 per tie) Total variable expenses Contribution margin Fixed expenses: Salaries Utilities Insurance Depreciation Miscellaneous Total fixed expenses Net operating income Interest expense (part2) Net income PAGE 7/10 4. Budgeted balance sheet: Hawkins Incorporated Budgeted Balance Sheet As of June 30 Assets Cash (part 2) Accounts receivable (look at lb) Inventory (# of ties * $5) Prepaid Insurance (March 31 balance minus the expense on the Income Statement) Property and equipment, net (March 31 balance plus what you purchased in May minus the depreciation on the Income Statement) Total assets Liabilities and Stockholders' Equity Accounts payable, purchases (look at 1d) Dividends payable (will still be $12,000) Common stock (did not change from March 31) Retained earnings (see below) Total liabilities and stockholders' equity PAGE Retained earings, April 1 Add net income (part 3) Less dividends declared Retained earnings, June 30

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