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You have just been contracted as a budget consultant by LBJ Company,
a distributor of bracelets to various retail outlets across the country. The
company has done very little in the way of budgeting and at certain
times of the year has experienced a shortage of cash.
You have decided to prepare a cash budget for the upcoming fourth
quarter in order to show management the benefits that can be gained
from proper cash planning. You have worked with accounting and other
areas to gather the information assembled below.
The company sells many styles of bracelets, but all are sold for the same
$10 price. Actual sales of bracelets for the last three months and
budgeted sales for the next six months follow:
The concentration of sales in the fourth quarter is due to the Christmas
holiday. Sufficient inventory should be on hand at the end of each month
to supply 40% of the bracelets sold in the following month.
Suppliers are paid $4 for each bracelet. Fifty-percent of a month's
purchases is paid for in the month of purchase; the other 50% is paid for
in the following month. All sales are on credit with no discounts. The
company has found, however, that only 20% of a month's sales are
collected in the month of sale. An additional 70% is collected in the
following month, and the remaining 10% is collected in the second
month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Variable expenses:
Sales commissions 4% of sales
Fixed expenses:
Advertising $220,000
Rent $20,000
Salaries
$110,000
Utilities
$10,000
Insurance
$5,000
Depreciation
$18,000
Insurance is paid on an annual basis, in January of each year.
The company plans to purchase $22,000 in new equipment during
October and $50,000 in new equipment during November; both