You have just been hired as a management trainee by Benjamin’s Fashions, a nationwide distributor of a designer's silk ties. The company has an exclusive franchise on the distribution of the ties, 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 responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next 12 months starting January 1, 2022. You are anxious to make a favorable impression on the president and have assembled the information below. The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8.00 each (75% of total sales, all on account) and $10.00 each to the individual customers in the mall stores (25% of total sales, all in cash). Recent and forecasted sales in units are as follows: Months Units Months Units August 2021 Actual 20,000 January 2022 Budgeted 60,000 September 2021 Actual 24,000 February 2022 Budgeted 40,000 October 2021 Actual 28,000 March 2022 Budgeted 36,000 November 2021 Budgeted 35,000 April 2022 Budgeted 32,000 December 2021 Budgeted 45,000 The large buildup in sales before and during January is due to the Festive seasons. The company is planning to open a new store in a shopping mall during May 2022 and expects to increase its’ sales by 20% every month from May to July 2022 and then decline by 5% from August till September 2022 and afterward the sales will be unchanged. Ending inventories are supposed to equal 90% of the next month's sales in units. The ties cost the company $5.00 each. The Opening of the new store will cost the company $45,000 in advertising during April 2022. Furniture and Fixtures will cost $20,000 during April. The rent for the new store will be $2,000 a month starting April 2022. A new Sales Manager will be hired at a monthly salary of $4,500 per month and he will start in April 2022. Additional costs of running the new store will be $2,500 per month. To cover all the extra costs due to the new store the owners decided to provide an interest-free loan of $70,000 to the company during May 2022 with a condition that the company will repay the loan as much as possible at the end of the year only if there is sufficient cash balance after the bank loan is repaid. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All credit sales to the retailers are due within 30 days. The company has found, however, that only 70% of a month's sales are collected by the following month, and the remaining 30% is collected in the second month following the sale. Bad debts have been negligible. The company's monthly operating expenses are given below: Variable cost: Sales Commission $1.00 per Tie sold Fixed Costs: Wages and Salaries $92,000 Utilities 14,000 Insurance 1,200 Depreciation 1,500 Miscellaneous 3,000 All operating expenses are paid during the month in cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The company's balance sheet on December 31, 2021, is given below: ASSETS Cash ……………………………………………………… $ 14,000 Accounts Receivable ($78,750 November sales; $337,500 from December Sales…… 416,250 Inventory (54,000 units) ………………………………………………… 270,000 Fixed Assets net of Depreciation …………………………………… 172,700 Total Assets ……………………………………………………………… $ 872,950 LIABILITIES AND SHAREHOLDERS EQUITY Accounts Payable ………………………………………………………… $ 168,750 Dividends Payable ………………………………………………………… 12,000 Capital Stock ……………………………………………………………… 400,000 Retained Earnings ………………………………………………………… 292,200 Total Liabilities and Shareholders’ Equity ……………………………….. $ 872,950 The company has an agreement with the Prime bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total line of credit balance of $70,000. 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 every month, the company would pay the bank all of the accumulated interest on the loan and pay back as much of the loan as possible (in increments of $1,000), while still retaining at least $10,000 in cash balance. Interest on the loan is paid only at the time of repayment of the loan and on the outstanding amount. Required: Prepare a master budget for the 12 months ending December 31, 2022. 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.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
You have just been hired as a management trainee by Benjamin’s Fashions, a nationwide distributor of a designer's silk ties. The company has an exclusive franchise on the distribution of the ties, 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 responsibility for all planning and budgeting. Your first assignment is to prepare a
Months Units Months Units
August 2021 Actual 20,000 January 2022 Budgeted 60,000
September 2021 Actual 24,000 February 2022 Budgeted 40,000
October 2021 Actual 28,000 March 2022 Budgeted 36,000
November 2021 Budgeted 35,000 April 2022 Budgeted 32,000
December 2021 Budgeted 45,000
The large buildup in sales before and during January is due to the Festive seasons. The company is planning to open a new store in a shopping mall during May 2022 and expects to increase its’ sales by 20% every month from May to July 2022 and then decline by 5% from August till September 2022 and afterward the sales will be unchanged. Ending inventories are supposed to equal 90% of the next month's sales in units. The ties cost the company $5.00 each.
The Opening of the new store will cost the company $45,000 in advertising during April 2022. Furniture and Fixtures will cost $20,000 during April. The rent for the new store will be $2,000 a month starting April 2022. A new Sales Manager will be hired at a monthly salary of $4,500 per month and he will start in April 2022. Additional costs of running the new store will be $2,500 per month. To cover all the extra costs due to the new store the owners decided to provide an interest-free loan of $70,000 to the company during May 2022 with a condition that the company will repay the loan as much as possible at the end of the year only if there is sufficient cash balance after the bank loan is repaid.
Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All credit sales to the retailers are due within 30 days. The company has found, however, that only 70% of a month's sales are collected by the following month, and the remaining 30% is collected in the second month following the sale.
Variable cost:
Sales Commission $1.00 per Tie sold
Fixed Costs:
Wages and Salaries $92,000
Utilities 14,000
Insurance 1,200
Depreciation 1,500
Miscellaneous 3,000
All operating expenses are paid during the month in cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The company's balance sheet on December 31, 2021, is given below:
ASSETS
Cash ……………………………………………………… $ 14,000
Accounts Receivable ($78,750 November sales; $337,500 from December Sales…… 416,250
Inventory (54,000 units) ………………………………………………… 270,000
Fixed Assets net of Depreciation …………………………………… 172,700
Total Assets ……………………………………………………………… $ 872,950
LIABILITIES AND SHAREHOLDERS EQUITY
Accounts Payable ………………………………………………………… $ 168,750 Dividends Payable ………………………………………………………… 12,000 Capital Stock ……………………………………………………………… 400,000
Retained Earnings ………………………………………………………… 292,200
Total Liabilities and Shareholders’ Equity ……………………………….. $ 872,950
The company has an agreement with the Prime bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total line of credit balance of $70,000. 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 every month, the company would pay the bank all of the accumulated interest on the loan and pay back as much of the loan as possible (in increments of $1,000), while still retaining at least $10,000 in cash balance. Interest on the loan is paid only at the time of repayment of the loan and on the outstanding amount.
Required: Prepare a master budget for the 12 months ending December 31, 2022. 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.
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