Master Budget for Smashing Frame Company

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Example for 7-B1 Prepare Master Budget (Please see second page for solution) Smashing Frame Company, a small Melbourne firm that sells frames on the Web, wants a master budget for the three months beginning January 1, 2008. It desires an ending minimum cash balance of $9,000 each month. Sales are forecasted at an average wholesale selling price of $18 per frame. Merchandise costs average $9 per frame. All sales are on credit, payable within 30 days, but experience has shown that 60% of current sales are collected in the current month, 30% in the next month, and 10% in the month thereafter. Bad debts are negligible.

In January, Smashing Frame is beginning just-in-time (JIT) deliveries from suppliers, which means that purchases will equal expected sales. On January 1, purchases will cease until inventory decreases to $11,000, after which time purchases will equal sales. Purchases during any given month are paid in full during the following month.

Monthly operating expenses are as follows:
Wages and salaries $20,000
Insurance expired 125
Depreciation 290
Miscellaneous 3000
Rent $300/month + 10% of quarterly
sales over $10,000

Cash dividends of $2000 are to be paid quarterly, beginning January 15, and are declared on the fifteenth of the previous month. All operating expenses are paid as incurred, except insurance, depreciation, and rent. Rent of $300 is paid at the beginning of each month, and the additional 10% of sales is paid quarterly on the tenth of the month following the end of the quarter. The next rent settlement date is January 10.

The company plans to buy some new fixtures for $11,000 cash in March. Money can be borrowed and repaid in multiples of $1000 at an interest rate of 10% per annum.

Management wants to minimize borrowing and repay rapidly. Interest is compounded monthly but paid when the principal is repaid. Assume that borrowing occurs at the beginning, and repayments at the end, of the months in question. Compute interest to the nearest dollar.

Assets as of Liabilities as of:
December 31, 2007 December 31, 2007
Cash $10,000 Accounts payable
Accounts receivable 18,000 (merchandise) $45,550
Inventory* 44,050 Dividends payable 2,500
Unexpired insurance 2,000 Rent payable 13,800
Fixed assets, net 17,900 $61,850

*November 30 inventory balance = $19,000.

Recent and forecasted sales:

October $48,000 December $36,000 February $73,000 April $55,000 November 35,000 January 68,000 March 39,000

#1 Budget
Schedule a: Sales BudgetJanuaryFebruaryMarch
Total sales forecast $68,000 $73,000 $39,000
(100% on credit)
Schedule b: Cash Collections
60% of current month's sales$40,800 $43,800 $23,400
30% of previous month's sales 10,800 12,240 13,140
10% of second previous month's sales3,600 4,080 4,380
Total collections $55,200 $60,120 $40,920

Schedule c: Purchases Budget
Desired ending inventory$44,050 $ 11,000* $ 11,000 $ 11,000
Cost of goods sold 18,000 34,000 36,500 19,500
Hint: $9/$18=.50 (50%sales)
Total needed$62,050 $45,000 $47,500 $30,500
Beginning inventory 19,000 44,050 10,050 8,500
Purchases$43,050 $ - $37,450 $39,000(sales) * Actual ending January (and beginning February) inventory level is 10,050, as inventory levels are drawn down toward desired level of $11,000.

Schedule d: Disbursements for Purchases
100% of previous month's purchases$43,050 $ - $37,450 March 31 accounts payable$39,000
Exhibit I
Smashing Frames
Cash Budget
For the Three Months Ending March 31, 2008


Cash balance, beginning$ 10,000 $44,420$15,590
Minimum cash balance desired 9,000...
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