Master Budget Problem:
You are the sole shareholder and operator of a small incorporated business that purchases virtual reality (VR) headsets and re-sells them.
You started your business five years ago. The following data have been assembled to assist in the preparation of the master budget for the first quarter (January, February and March) of 2018.
As of December 31, 2017 your company had the following balance sheet:
*10,000 common shares issued for $1 each
1. The company sells each headset for $230. Actual sales for November were 360 units and for December were 376 units. In January it is expected that sales will decrease by 10%, but then will increase by 5% in February and will continue to increase by 5% each month after.
2. 20% of the cash for sales is collected in the month of sale, 40% is collected in the following month, and the remaining 40% is collected in the month after that. For simplicity, all sales taxes will be ignored.
3. The company purchases enough units each month to cover the current month's sales and maintain an ending inventory equal to 70% of the following month's projected sales. Each unit costs the company $150. Inventory purchases are paid for in the month following purchase.
4. The company is expected to incur fixed operating expenses of $2,750 per month.
5. On August 1, 2017, the company paid $6,000 for one year's insurance coverage.
6. Variable operating expenses have usually been about 15% of sales for the month. This will continue in January, but they expect to see an increase to 17% by February that will continue. Operating expenses are paid for in the month incurred.
7. Interest is paid monthly on the long-term loan at a rate of 6% per year. They are also required to make quarterly principal payments, the next is due at the end of March for $1,500.
8. Equipment costing $13,000 will be purchased for cash at the beginning of January. All equipment is depreciated on a straight-line basis over 10 years with no residual value.
9. You pay salaries totalling $4,200 each month. For simplicity, ignore all payroll tax implications.
10. You issue 2,000 additional common shares and sell them to your uncle for $1.00 per share at the end of February.
11. You will declare and pay a dividend of $3,000 at the beginning of February.
12. Income tax expense for this small business is calculated at 15% of the earnings before taxes. The company pays income tax instalments of $400 per month.
13. The company must maintain a minimum cash balance of $5,000. A short-term loan is available to cover any shortfall. Interest is paid monthly on the previous month's loan balance at a rate of 9% per year. Any cash above $5,000 available at month end is used to reduce any existing short-term loan. The interest for the short term debt should be calculated and shown separately from the long term debt.