Question

Big Al’s Pizza, Inc. needs a cash budget for year 3 and has provided you with the following information. Sales are all on account and are estimated to be collected over a three-month period, with 70 percent collected in the month of sale, 25 percent collected in the next month and 4 percent collected in the third month. The remaining 1 percent is estimated to be uncollectible. December and November sales from the previous year were $201,638 and $185,000 respectively. Because of the lag in collecting cash from sales on account, Big Al’s delays payment on some of its purchases of materials. Big Al’s estimates that 60 percent of each month’s material purchases are paid in the month of purchase and 40 percent in the following month. The accounts payable balance for materials at the end of the previous year was $20,000. Big Al’s also requires a minimum balance of $40,000 in cash at the end of each month. The company will use its line of credit when needed to bring the balance up to that minimum level. For any money borrowed, the interest rate is 6 percent compounded annually. For simplicity, you can assume that cash is borrowed on the first day of the month and that loan repayments are made at the end of the month. Big Al’s plans to exercise the option on the leased production equipment in March (as described in Part 7). The purchase price on the equipment will be $153,450, with payments of $3,260.36 per month. Big Al’s also plans on expanding the existing production space in May at a cost of $200,000. Big Al’s would like to finance the expansion out of current earnings and so will use the line of credit, if necessary, in May. The expansion will cause fixed manufacturing overhead to increase by $10,000 per month, starting in May.

Required:
A. Prepare a cash receipts budget for year 3, assuming estimated sales of 385,000 meat pizzas and 30,000 veggie pizzas and the following monthly distribution of sales.

January 8.3%	July 8.5%
February 9.2	August 9.8
March 10.3	September 7.5
April 7.6	October 9.1
May 8.0	November 7.2
June 6.9	December 7.6

Direct material costs per unit are $.74 per meat pizza and $.62 per veggie pizza.Direct labor costs are $2.51 per meat pizza and $2.78 per veggie pizza. Monthly fixed selling and administrative costs are $15,300, while monthly fixed manufacturing overhead is $2,851. The variable overhead cost is $.55 per pizza. The sales price for veggie pizzas is $5.25 per pizza and the sales price for meat pizzas is $5.00.
B. Prepare a cash disbursements budget for the year.
C. Prepare a summary cash budget for the year, showing any borrowing and repayment of debt with interest. Discuss Big Al’s ability to repay the expansion loan. Include a discussion of the feasibility of the project. Include qualitative factors to be considered.
D. What if the sales forecast was increased by 50 percent? What impact does that have on the budget, and what is the potential impact on the company?

Answer 1

A. Cash receipts budget

Particulars	Jan	Feb	Mar	Apr	May	June	July	Aug	Sep	Oct	Nov	Dec
25% of previous years sales	$ 50410
4% of previous years sales	$ 7400	$ 8066
Meat pizzas - 70% sales	$ 111843	$ 123970	$ 138793	$ 102410	$ 107800	$ 92978	$ 114538	$ 132055	$ 101063	$ 122623	$ 97020	$ 102410
Meat pizzas- 25% sales		$ 39944	$ 70840	$ 49569	$ 36575	$ 38500	$ 33206	$ 40906	$ 47163	$ 36094	$ 43794	$ 34650
Meat pizzas - 4% sales			$ 6391	$ 7084	$ 7931	$ 5852	$ 6160	$ 5313	$ 6545	$ 7546	$ 5775	$ 7007
Veg pizzas - 70% sales	$ 9151	$ 10143	$ 11356	$ 8379	$ 8820	$ 7607	$ 9371	$ 10805	$ 8269	$ 10033	$ 7938	$ 8379
Veg pizzas - 25% sales		$ 3268	$ 3623	$ 4056	$ 2993	$ 3150	$ 2717	$ 3347	$ 3859	$ 2953	$ 3583	$ 2835
Veg pizzas - 4% sales			$ 523	$ 580	$ 649	$ 479	$ 504	$ 435	$ 536	$ 617	$ 473	$ 573
Total cash receipts	$ 178804	$ 185391	$ 231526	$ 172078	$ 164768	$ 148566	$ 166496	$ 192861	$ 167435	$ 179866	$ 158853	$ 155854

B. Cash disbursements budget

Particulars	Jan	Feb	Mar	Apr	May	June	July	Aug	Sep	Oct	Nov	Dec
Materials payment current	$ 15114	$ 16753	$ 18756	$ 13840	$ 14568	$ 12565	$ 15479	$ 17846	$ 13658	$ 16571	$ 13111	$ 13840
Materials payment previous	$ 20000	$ 10076	$ 11169	$ 12504	$ 9226	$ 9712	$ 8377	$ 10319	$ 11897	$ 9105	$ 11047	$ 8741
Direct labour	$ 87129	$ 96577	$ 108124	$ 79781	$ 83980	$ 72433	$ 89229	$ 102876	$ 78731	$ 95527	$ 75582	$ 79781
Variable overhead	$ 18945	$ 20999	$ 23510	$ 17347	$ 18260	$ 15749	$ 19401	$ 22369	$ 17119	$ 20771	$ 16434	$ 17347
Fixed selling overhead	$ 15300	$ 15300	$ 15300	$ 15300	$ 15300	$ 15300	$ 15300	$ 15300	$ 15300	$ 15300	$ 15300	$ 15300
Fixed manufacturing overhead	$ 2851	$ 2851	$ 2851	$ 2851	$ 2851	$ 2851	$ 2851	$ 2851	$ 2851	$ 2851	$ 2851	$ 2851
Expansion cost					$ 200000
Expansion overheads					$ 10000	$ 10000	$ 10000	$ 10000	$ 10000	$ 10000	$ 10000	$ 10000
Lease payments	$ 3260.36	$ 3260.36	$ 3260.36	$ 3260.36	$ 3260.36	$ 3260.36	$ 3260.36	$ 3260.36	$ 3260.36	$ 3260.36	$ 3260.36	$ 3260.36
Total disbursements	$ 162599.36	$ 165816.36	$ 182790.36	$ 144883.36	$ 357445.36	$ 141870.36	$ 163897.36	$ 184821.36	$ 152816.36	$ 173385.36	$ 147585.36	$ 151120.36

C. Summary budget ($)

Particulars	Jan	Feb	Mar	Apr	May	June	July	Aug	Sep	Oct	Nov	Dec
Opening balance	40000	56204.64	75779.28	124514.92	151709.56	40000	40000	40000	40000	40000	40000	40000
Total receipts	178804	185391	231526	172078	164768	148566	166496	192861	167435	179866	158853	155854
Total payments	162599.36	165816.36	182790.36	144883.36	357445.36	141870.36	163897.36	184821.36	151816.36	173385.36	147585.36	151120.36
Credit taken					80967.80	74677.16	72451.52	64773.88	49479.24	43245.60	32193.96	27621.32
Credit repaid						81372.8	75050.16	72813.52	65097.88	49726.24	43461.60	32354.96
Closing balance	56204.64	75779.28	124514.92	151709.56	40000	40000	40000	40000	40000	40000	40000	40000

We have assumed that opening cash is the minimum required by the company as nothing was mentioned in the question.

D. If the sales forecast was increased by 50% then the loan requirement would go down. The cash outflows would be curtailed. The cash inflow would go up because of the net margin between sales price and variable costs.