Question: Memories, Inc., needs a cash budget for Year 3 and has provided you with the following information.
• Sales are all on account (no cash) 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 Year 2 were $201,638 and $185,000, respectively.
• Because of the lag in collecting cash from sales on account, MI delays payment on some of its purchases of materials. MI estimated 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 Year 2 was $20,000.
• MI 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. The loan payable balance at the end of Year 2 was zero. The cash balance at the end of Year 2 was $40,000.
• Memories, Inc. plans to exercise the option on the leased production equipment in March (see Part Seven). The purchase price on the equipment will be $153,450 with payments of $3,260.36 per month. MI also plans on expanding the existing production space in May at a cost of $200,000. The company 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.
To remind you, the following costs still hold:
Direct material costs $.74 per doll and $.62 per replica
Direct labor costs $2.51 per doll and $2.78 per replica
Fixed selling and admin costs $15,300 per month
Fixed manufacturing overhead costs $2,851 per month
Variable overhead costs $.55 per figurine
Sales price $5.00 per doll and $5.25 per replica
Required: A. Prepare a cash receipts budget for Year 3, assuming estimated sales of 385,000 dolls and 30,000 replicas. The following chart shows the monthly distribution of these 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%
B. Prepare a cash disbursements budget for Year 3.
C. Prepare a summary cash budget for Year 3, showing any borrowing and repayment of debt with interest.
D. Discuss the company's ability to repay the expansion loan. Include a discussion of the feasibility of the project. Include qualitative factors to be considered.
E. 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? (Prove your answer by rerunning your budgets with the new amounts. If you set up your spreadsheet correctly, this should take two seconds.)