Question

Project 2 - Case 2 40 points Davis Dry Goods distributes silk ties. You are in charge of creating Davis' master budget for the upcoming second quarter, April-June 2018. Davis desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $9 each. Recent and forecasted sales in units are as follows: January (actual) February (actual) March (actual) April May 21,000 June 25,000 July 27,000 August 32,000 September 45,000 65,000 43.000 40,000 36,000 The large buildup in sales before and during June is due to Father's Day. Ending inventories are supposed to equal 90% of the next month's sales in units. The ties cost the company $5 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% 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 by month-end. An additional 75% is collected in the following month. Bad debts have been negligible. The company's monthly selling and administrative expenses are given below: $ 1 per tie Variable: Sales commissions Fixed: Wages and salaries Utilities Insurance Depreciation Miscellaneous $ 25,200 $ 16,000 $ 1,300 $ 1,500 $ 3,600 All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Davis has an agreement with a bank that allows it 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 bank all of the accumulated interest on the loan and as much of the loan as possible in increments of $1,000), while still retaining at least $10,000 in cash.

Answer 1

Davis Dry Goods Sales Budget April 32000 May 45000 June 65000 Quarter 142000 Units Selling Price Total Sales 288000 405000 585000 1278000 Collections May June March April April 182250 72000 216000 101250 Quarter 182250 288000 405000 146250 1021500 May June Total 303750 146250 450000 254250 317250 Purchase Budget Units Ending Invent. April 32000 40500 72500 -28800 43700 5 218500 May 45000 58500 103500 -40500 63000 5 315000 June 65000 38700 103700 -58500 45200 5 226000 Quarter 142000 38700 180700 -28800 151900 5 759500 Beginning Inv. Purchase units Cost per Tie Total Purchase cost Purchase Payments May June March April April 78750 109250 109250 157500 Quarter 78750 218500 315000 113000 725250 May June Total 157500 113000 270500 188000 266750

Cash Budget For the Quarter Ending June 30 Opening Balance Collections April 11000 254250 265250 May 10450 317250 327700 June 10150 450000 460150 Quarter 11000 1021500 1032500 188000 32000 25200 16000 266750 45000 25200 16000 3600 21000 270500 65000 25200 16000 3600 3600 Payments: Purchase Payments Sales Commissions Wages and Salaries Utilities Miscellaneous Land Purchased Dividends Total Payments Excess Cash over payments Financing Borrowing Repayment Interest Total Cash Balance 725250 142000 75600 48000 10800 21000 10000 1032650 - 150 10000 274800 -9550 377550 -49850 380300 79850 20000 60000 -68284 -1566 -69850 10000 80000 -68284 -1566 10150 10000 20000 10450 60000 10150 10000 = 79850 - 20000 - 600 - X -0.02% 10730 = 1.02x X = 48284 0.02x = 966+600 = 1566 20000 x 0.01 x 3 = 600

1278000 Budgeted Income Statement For the Quarter Ending June 30 Sales Cost of Goods sold: Opening Inventory Purchased Closing Inventory Gross Margin 144000 759500 -193500 710000 568000 Sales Commissions Wages and Salaries Utilities Miscellaneous Insurance expense Depreciation Interest Expense Net Income 142000 75600 48000 10800 3900 4500 1566 286366 281634 Statement of Retained Earnings For the Quarter Ending June 30 Beginning Net Income 181200 281634 462834 -10000 452834 Dividends Balance sheet As at June 30 Assets Cash Accounts Receivable Inventory Prepaid insurance Fixed assets, net Total Assets 10000 438750 193500 11700 233600 887550 80000 - 68284 Liabilities & Stockholders Equity Accounts Payable Bank Loan Capital Stock Retained Earnings Total Liabilities and Stockholders Equity 113000 11716 310000 452834 887550