Question

Budgeting Case

The following data relate to the operations of Milley Corporation, and wholesale distributor of durable hats with hidden pockets that are popular for adventure travel.  The hats are sold in travel boutiques and department stores nationwide.   

Current assets as of December 31:     Cash     Accounts Receivable    Inventory  Buildings and Equipment, net  Accounts Payable  Common Shares  Retained Earnings

$6,000  36,000  9,800  110,885  32,550  100,000 30,135

 

a.     The gross margin in 30% of sales. 

b.    Actual and budgeted sales data are as follows: 

December (actual)  January February March  April

$60,000  70,000  80,000  85,000  55,000

 

c.     Sales are 40% for cash and 60% on credit.  Credit sales are collected in the month following sale.  The accounts receivable at December 31 are the result of December credit sales.  

d.    Each month’s ending inventory should equal 20% of the following month’s budgeted cost of goods sold.  

e.     One-quarter of a month’s inventory purchases is paid for in the month of purchase; the other three-quarters is paid for in the following month.  The accounts payable at December 31 are the result of December purchases of inventory.  

f.      Monthly expenses are as follows: commissions, $12,000; rent $1,800; other expenses 

(excluding depreciation), 8% of sales.  Assume that these expenses are paid monthly.  Depreciation is $2,400 for the quarter and includes depreciation on new assets acquired during the quarter.   

g.     Equipment will be acquired for cash:  $3,000 in January and $8,000 in February.  

h.    Management would like to maintain a minimum cash balance of $5,000 at the end of each month.   The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $50,000.   The interest rates on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded.  The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.  

Required part a): 

1.     Using the data above, complete the following schedules:

Schedule of Expected Cash Collection			s
	January	February	March	Quarter
Cash Sales  Credit Sales  Total Collections	$28,000  36,000$64,000	_______	_______	_______

 

 

Mer	chandise Purchases Budget
	January	February	March	Quarter
Budgeted Cost of Goods sold   Add desired ending inventory  Total needs  Less beginning inventory  Required purchases	$49,000a  11,200b  $60,200  9,80050,400	_______	_______	_______
a $70,000 sales*70%=$49,000 b $80,000*70%*20%=$11,200

 

 

Schedule of Expected Cash Disbursements: Merchandise Purchase				s
	January	February	March	Quarter
December Purchases  January Purchases February Purchases March Purchases  Total Disbursements	$32,550a  12,600     $45,150	$37,800    _______	_______	$32,550  50,400    _______
a Beginning balance of accounts payable

 

             

 

Schedule of Expected Cash Disbursements: Selling and Administrative Expenses
	January	February	March	Quarter
Commissions Rent  Other Expenses  Total Disbursements	$12,000 1,800  5,600$19,400	_______	_______	_______

 

	Cash Budget
	January	February	March	Quarter
Cash balance, beginning Add cash collections  Total cash available    For inventory     For operating expenses     For equipment  Total cash disbursements Excess (deficiency) of cash Financing:   Etc.	$6,000 64,000 70,000 45,150  19,400  3,000 67,550 $2,450	_____    ____     _____   _____	_____    ____     _____   _____	_____    ____     _____   _____

 

2.     Prepare an absorption costing income statement for the quarter ended March 31.  

3.     Prepare a balance sheet as at March 31.  

 

Required part b): 

1)         Imagine the COVID-19 pandemic had started in December (the month preceding the schedules you completed in part a) 2018.  Milley Manufacturing now estimates that sales (in units and dollars) will be 40% less than originally anticipated for January, 

February and March and hopes that normal operations will resume in April and May.  

As a result, the company should qualify for the Canada Emergency Wage Subsidy (Claim Period 2 which reimbursed the company for 75% of its wages as long as payments to employees were not reduced and revenues declined at least 30%.  Recalculate the budgets and statements from parts 1 and 2, identifying the assumptions you must make.  

 

Required part c): 

1)    Provide any suggestions, recommendations, or issues for the company to consider in making their decision.  So, for example, you could suggest other ideas that the company could incorporate into future iterations of the budget (it is not necessary to do more than the two versions we have already required:  the first original version, and second version incorporating the Canada Emergency Wage Subsidy).  Don’t be afraid to “think outside the box”:  That’s what companies, and all of us, have had to do!