Question :
You have just been hired as a management trainee by Cravat Sales Company, a countrywide distributor of a designer's silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so quickly over the last few years that it has become essential to add new members to the management team. You have been given responsibility for all budgeting and planning. Your first assignment is to arrange a master budget for the next three months, starting April 1. You are anxious to make a positive impression on the president and have assembled the information given below.

The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each. Forecasted and Recent sales in units are as follows:

January (actual)                                    22,000 June             67,000

February (actual)                            33,000 July              46,000

March (actual)                                 37,000 August            37,000

April                                                    41,000 September 34,000

May                                                     51,000

The large buildup in sales before and during June is due to Father's Day. Ending inventories are supposed to equivalent 90% of the next month's sales in units. The ties cost the company $5 each.

Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the subsequent month. All sales are on credit, with no discount, and payable within 15 days. The company has found, thus, that only 25% of a month's sales are collected by month-end. An additional 50% is collected in the provided month, and the outstanding 25% is collected in the second month subsequent sale. Bad debts have been negligible.

The company's monthly selling and administrative expenses are given below:

Variable:             

Sales commissions          $ 1 per tie

Fixed:   

Wages and salaries        $ 23,500

Utilities                             $ 15,300

Insurance                          $ 1,200

Depreciation                     $ 1,500

Miscellaneous                  $ 3,100

All selling and administrative expenses are paid in the current month, in cash, with the exception of depreciation and insurance expired. Land can be purchased during May for $26,000 cash. The company declares dividends of $9,000 each quarter, payable in the 1^st month of the subsequent quarter. The company's balance sheet at March 31 is provided below:

Assets

Cash      $ 19,000

Accounts receivable ($66,000 February sales; $222,000 March sales)        288,000

Inventory (36,900 units)                184,500

Prepaid insurance            14,400

Fixed assets, net of depreciation              82,500

Total assets        $ 588,400

Liabilities and Stockholders' Equity

Accounts payable            $101,500

Dividends payable           9,000

Capital stock       300,000

Retained earnings           177,900

Total liabilities and stockholders' equity $              588,400

The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the starting of each month, up to a total loan balance of $90,000. The interest rate on loans is 1% per month, and for ease, we will consider that interest is not compounded. At the end of the quarter, the company could pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $10,000 in cash.