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Chapter 22: Q34E (page 1238)

Preparing a financial budget—cash budget, sensitivity analysis

Leichter Auto Parts, a family-owned auto parts store, began January with \(10,500 cash. Management forecasts that collections from credit customers will be \)11,000 in January and \(15,200 in February. The store is scheduled to receive \)8,500 cash on a business note receivable in January. Projected cash payments include inventory purchases (\(15,600 in January and \)14,800 in February) and selling and administrative expenses (\(2,900 each month).

Leichter Auto Part'sbank requires a \)10,000 minimum balance in the store’s checking account. At the end of any month when the account balance falls below \(10,000, the bank automatically extends credit to the store in multiples of \)1,000. Leichter Auto Parts borrows as little as possible and pays back loans in quarterly installments of \(2,000, plus 4% APR interest on the entire unpaid principal. The first payment occurs three months after the loan.

Requirements

1. Prepare Leichter Auto Part'scash budget for January and February.

2. How much cash will Leichter Auto Parts borrow in February if collections from customers that month total \)14,200 instead of $15,200?

Short Answer

Expert verified

Answer

Leichter Auto Parts will borrow $ 2,000 in February if the collection from the customer is $ 14,200 instead of $ 15,200 that month.

Step by step solution

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01

Sensitivity analysis


January

February

Beginning cash balance

$10,500

$11,500

Cash received from customers

$11,000

$15,200

Cash on note receivables

$8,500

$0

Cash available

$30,000

$26,700

Payments:



Inventory purchase

$15,600

$14,800

Selling and administrative expenses

$2,900

$2,900

Total cash payments

$18,500

$17,700

Ending cash balance before financing

$11,500

$9,000

Financing:



Borrowing

$0

$1,000

Ending cash balance financing

$11,500

$10,000

02

Preparation of schedule of cash payments


February

Beginning cash balance

$11,500

Cash received from customers

$14,200

Cash on note receivables

$0

Cash available

$25,700

Payments:


Inventory purchase

$14,800

Selling and administrative expenses

$2,900

Total cash payments

$17,700

Ending cash balance before financing

$8,000

Financing:


Borrowing

$2,000

Ending cash balance financing

$10,000

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Most popular questions from this chapter

Question: Preparing an operating budget—sales budget; inventory, purchases and COGS budget; and S&A expense budget Burton Office Supply’s March 31, 2018, balance sheet follows:

The budget committee of Burton Office Supply has assembled the following data: a. Sales in April are expected to be \(200,000. Burton forecasts that monthly sales will increase 2% over April sales in May. June’s sales will increase by 4% over April sales. July sales will increase 20% over April sales. b. Burton maintains inventory of \)15,000 plus 25% of the cost of goods sold budgeted for the following month. Cost of goods sold equal 50% of sales revenue. c. Monthly salaries amount to \(7,000. Sales commissions equal 5% of sales for that month. d. Other monthly expenses are as follows: • Rent: \)2,000 • Depreciation: \(200 • Insurance: \)100 • Income tax: $2,200

Requirements

1. Prepare Burton’s sales budget for April and May 2018. Round all calculations to the nearest dollar.

2. Prepare Burton’s inventory, purchases, and cost of goods sold budget for April and May.

3. Prepare Burton’s selling and administrative expense budget for April and May.

What are the three sections of the cash budget?

What is sensitivity analysis? Why is it important for managers?

Question: Preparing an operating budget—sales, production, direct materials, direct labor, overhead, COGS, and S&A expense budgets

The Langley Batting Company manufactures wood baseball bats. Langley’s two primary products are a youth bat, designed for children and young teens, and an adult bat, designed for high school and college-aged players. Langley sells the bats to sporting goods stores, and all sales are on account. The youth bat sells for \(40; the adult bat sells for \)65. Langley’s highest sales volume is in the first three months of the year as retailers prepare for the spring baseball season. Langley’s balance sheet for December 31, 2018, follows:

Other data for Langley Batting Company for the first quarter of 2019:

a. Budgeted sales are 1,200 youth bats and 2,600 adult bats.

b. Finished Goods Inventory on December 31, 2018, consists of 300 youth bats at \(14 each and 950 adult bats at \)18 each.

c. Desired ending Finished Goods Inventory is 350 youth bats and 300 adult bats; FIFO inventory costing method is used.

d. Direct materials requirements are 48 ounces of wood per youth bat and 56 ounces of wood per adult bat. The cost of wood is \(0.25 per ounce.

e. Raw Materials Inventory of December 31, 2018, consists of 24,000 ounces of wood at \)0.25 per ounce.

f. Desired ending Raw Materials Inventory is 24,000 ounces (indirect materials are insignificant and not considered for budgeting purposes).

g. Each bat requires 0.7 hours of direct labor; direct labor costs average \(18 per hour. h. Variable manufacturing overhead is \)0.30 per bat.

i. Fixed manufacturing overhead includes \(1,300 per quarter in depreciation and \)20,140 per quarter for other costs, such as insurance and property taxes.

j. Fixed selling and administrative expenses include \(9,000 per quarter for salaries; \)2,500 per quarter for rent; \(1,000 per quarter for insurance; and \)200 per quarter for depreciation.

k. Variable selling and administrative expenses include supplies at 2% of sales.

Requirements

1. Prepare Langley’s sales budget for the first quarter of 2019.

2. Prepare Langley’s production budget for the first quarter of 2019.

3. Prepare Langley’s direct materials budget, direct labor budget, and manufacturing overhead budget for the first quarter of 2019. Round the predetermined overhead allocation rate to two decimal places. The overhead allocation base is direct labor hours.

4. Prepare Langley’s cost of goods sold budget for the first quarter of 2019.

5. Prepare Langley’s selling and administrative expense budget for the first quarter of 2019.

Question:Brooks Company expects to sell 8,500 units for \(175 each for a total of \)1,487,500 in January and 2,500 units for \(200 each for a total of \)500,000 in February. The company expects cost of goods sold to average 70% of sales revenue, and the company expects to sell 4,700 units in March for \(280 each. Brooks’s target ending inventory is \)20,000 plus 50% of the next month’s cost of goods sold. Prepare Brooks’s inventory, purchases, and cost of goods sold budget for January and February
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