Question

Aztec Company sells its product for $190 per unit its actual and budgeted sales to low. Units Dollars $950,000 Aprill (actual) May (actual) June (budgeted) July (budgeted) August (budgeted) 5.000 2,000 7,500 6,000 4,300 380,000 1.425,000 1.140,000 817,000 All sales are on credit. Recent experience shows that 20% of credit sales is collected in the month of the sale, 50% in the month after the sale, 29% in the second month after the sale, and 1% proves to be uncollectible. The product's purchase price is $110 per unit. All purchases are pevable within 15 days. Thus 60% of purchases made in a month is paid in that month and the other 40% paid in the next month. The company has a policy to maintain an ending monthly Inventory of 24% of the next month's unit seles plus a safety stock of 55 units. The April 30 and May 31 actual Inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1.850.000 and are paid evenly throughout the year in cash. The company's minimum cash balance at month-end is $130,000. This minimum is maintained, necessary, by borrowing cash from the bank. If the balance exceeds $130,000, the company repays as much of the loen as it can without going below the minimum. This type of loan carries an annual 10% Interest rate. On May 31, the loan balance is $49,000, and the company's cash balance is $130,000

Answer 1

Solution

Aztec Company

1. Table that shows the computation of cash collections of its credit sales in each of the months of June and July:

Cash collections from credit sales
	Percent Collected in
Credit Sales from:	April	May	June	July	August	Total
April	20%	50%	29%	-	-	99%
May	-	20%	50%	29%	-	99%
June	-	-	20%	50%	29%	99%
July	-	-	-	20%	50%	70%
August	-	-	-	-	20%	20%

Cash collections from credit sales
	Amount Collected in
Credit Sales from:	Total	April	May	June	July	August
April	$950,000	$190,000	$475,000	$275,500	-	-
May	$380,000	-	$76,000	$190,000	$110,200	-
June	$1,425,000	-	-	$285,000	$712,500	$413,250
July	$1,140,000	-	-	-	$228,000	$570,000
August	$817,000	-	-	-	-	$163,400
Total Cash Collections		$190,000	$551,000	$750,500	$1,050,700	$1,146,650

Cash collections from credit sales in the each of the months of June and July are $750,500 and $1,050,700, respectively.

2. Table that shows budgeted ending inventories (in units) for April, May, June and July:

	Aztec Company
	Budgeted Ending Inventories
	For April, May, June and July
	April	May	June	July
Next month's budgeted sales (units)	2,000	7,500	6,000	4,300
Ratio of inventory to future sales (percent)	24%	24%	24%	24%
Budgeted 'base' ending inventory (units)	480	1,800	1,440	1,032
safety stock	55	55	55	55
Budgeted ending inventory (units)	535	1,855	1,495	1,087

3. Merchandise purchases budget for May, June and July:

Aztec Company
Merchandise Purchases Budget
For May, June and July
	May	June	July
Sales (units)	2,000	7,500	6,000
Budgeted ending inventory (units)	1,855	1,495	1,087
Required units of available merchandise	3,855	8,995	7,087
Less: beginning inventory (units)	535	1,855	1,495
Budgeted purchases (units)	3,320	7,140	5,592
Purchase price per unit	$110	$110	$110
Budgeted Cost of Merchandise Purchases	$365,200	$785,400	$615,120

4. Table showing computation of cash payment for product purchases for June and July:

Aztec Company
Cash payment on product purchases (for June and July)
	Percent paid in
	May	June	July
From purchases in:
May	60%	40%	-
June	-	60%	40%
July	-	-	60%
	Amount paid in
	May	June	July
From purchases in:
May	$219,120	$146,080
June	-	$471,240	$314,160
July	-	-	$369,072
Amount paid for purchases	$219,120	$617,320	$683,232

Hence, amount for merchandise purchases in each of the two months, June and July are $617,320 and $683,232, respectively.

5. Cash budget for June and July:

	Aztec Company
	Cash Budget
	June and July
	June	July
Beginning cash balance	$130,000	$130,000
Cash collections from credit sales	$750,500	$1,050,700
Total cash available	$880,500	$1,180,700
Cash disbursements:
Budgeted purchases	$617,320	$683,232
selling and administrative expenses	$155,000	$155,000
Interest expense	$408	$594
total cash disbursements	$772,728	$838,826
Preliminary cash balance	$107,772	$341,874
Loan	$22,228	($270,646)
Ending cash balance	$130,000	$130,000
	Loan Balance
Loan balance - beginning of the month	$49,000	$71,228
Additional loan (loan repayment)	$22,228	($71,228)
Loan balance - end of the month	$71,228	0

Notes:

Interest expense – June – 49,000 x 10% x 1/12 = $408

Interest expense – July – 71,228 x 10% x 1/12 = $594

Monthly selling and administrative expenses = $1,860,000/12 = $155,000