Chapter 22, Problem 1R

Ranger Industries has provided the following information at June 30:

Other information:

Average selling price, $196

Average purchase price per unit, $110

Desired ending inventory, 40% of next month’s unit sales

Collections from customers:

In month of sale    20%

In month after sale    50%

Two months after sale    30%

Projected cash payments:

Inventory purchases are paid for in the month following acquisition.

Variable cash expenses, other than inventory, are equal to 25% of each month’s sales and are paid in the month of sale.

Fixed cash expenses are $40,000 per month and are paid in the month incurred.

Depreciation on equipment is $2,000 per month.

REQUIREMENT

You have been asked to prepare a master budget for the upcoming quarter (July, August, and September). The components of this budget are a monthly sales budget, a monthly purchases budget, a monthly cash budget, a forecasted income statement for the quarter, and a forecasted September 30 balance sheet. The worksheet MASTER has been provided to assist you.

Ranger Industries desires to maintain a minimum cash balance of $8,000 at the end of each month. If this goal cannot be met, the company borrows the exact amount needed to reach its goal. If the company has a cash balance greater than $8,000 and also has loans payable outstanding, the amount in excess of $8,000 is paid to the bank. Annual interest of 18% is paid on a monthly basis on the outstanding balance.

To determine

Prepare the master budget for July, August and September.

Explanation of Solution

Master budget: Master budget is an interrelated budget that collectively summarizes all the planned activities of the business. Master budget is not a single document and it consist the number of interrelated budgets like sales budget, production budget, and cash budget. Master budget helps the management to review the upcoming quarter budget with the monthly amount of budget figures.

Prepare a sales budget:

Sales budget
Particulars	July	August	September
Units $\left(\text{A}\right)$	1,600	1,400	1,500
Average selling price $\left(\text{B}\right)$	$ 196	196	196
Total $\left(\text{C}\right)=\left(\text{A}\times \text{B}\right)$	$313,600	274,400	294,000

Table (1)

Prepare a purchase budget:

Purchase budget
Particulars	July	August	September
Desired ending inventory $\left(\begin{array}{l}\text{Actual and budgeted unit}\\ \times \text{Desired ending inventory}\end{array}\right)$	560	600	480
Current month's unit sales	1,600	1,400	1,500
Total units needed	2,160	2,000	1,980
Less: Beginning inventory $\left(\frac{\text{Merchandise inventory}}{\text{Average purchase cost per unit}}\right)$	640	560	600
Purchases (units) $\left(\text{A}\right)$	1,520	1,440	1,380
Average purchase cost per unit $\left(\text{B}\right)$	$110	110	110
Purchases (dollars) $\left(\text{C}\right)=\left(\text{A}\times \text{B}\right)$	$167,200	$158,400	$151,800

Table (2)

Prepare a cash budget:

Cash Budget
Particulars	July	August	September
Cash balance, beginning	$12,480	$8,000	$8,000
Cash receipts:
Collections from customers:
From May sales	82,320
From June sales	98,000	58,800
From July sales	62,720	156,800	94,080
From August sales		54,880	137,200
From September sales			58,800
Total cash available	$255,520	$278,480	$298,080
Cash disbursements:
Merchandise	$136,400	$167,200	$158,400
Variable expenses	78,400	68,600	73,500
Fixed expenses	40,000	40,000	40,000
Interest paid	0	109	191
Total disbursements	$254,800	$275,909	$272,091
Cash balance before financing	$720	$2,571	$25,989
Less:  Desired ending balance	8,000	8,000	8,000
Excess (deficit) of cash over needs	($7,280)	($5,429)	$17,989
Financing
Borrowing	$7,280	$5,429	$0
Repayment	0	0	(12,709)
Total effects of financing	$7,280	$5,429	($12,709)
Cash balance, ending	$8,000	$8,000	$13,280

Table (3)

Prepare a forecasted income statement:

Forecasted Income Statement
For Quarter Ended September 30
Particulars	Amount($)
Sales	$882,000
Cost of goods sold	495,000
Gross profit	$387,000
Expenses:
Variable expenses	$220,500
Fixed expenses	120,000
Depreciation expense	6,000
Interest expense	300
Total expenses	$346,800
Net income	$40,200

Table (4)

Prepare a forecasted balance sheet:

Forecasted Balance Sheet
as of September 30
Particulars	Amount ($)
Assets:
Cash	$13,280
Accounts receivable	317,520
Merchandise inventory	52,800
Fixed assets (net)	124,000
Total assets	$507,600
Liabilities & equity:
Accounts payable	$151,800
Loans payable	0
Owner's equity	355,800
Total liabilities & equity	$507,600

Table (5)