PROBLEMSETC

PROBLEM231C
MasterBlastersellstwodifferenttypesofsquirtguns.ThecompanysMay31inventoriesare
Oozy Squirters, 900 units and Slime Streamers, 400 units. The company has had inventory
problemsrelatedtotheseproducts. Theyhavebeenpurchasingonlywhenthesupplierhasa
sale.Attimestheinventoryseemsexcessiveandothertimestheydonothaveenoughinventory
to satisfy the demand. Management believes that recently excessive inventories have
accumulatedforbothproducts.Asaresult,anewpolicydictatesthatendinginventoryinany
monthshouldequal25%oftheexpectedunitsalesforthefollowingmonth.Expectedsalesin
unitsforJune,July,August,andSeptemberfollow:
BudgetedSalesinUnits
June JulyAugustSeptember
OozySquirter
2,0002,5001,800
1,000
SlimeStreamer
1,2003,000800
400
Required
1.Prepareamerchandisepurchasesbudget(inunits)foreachproductforeachofthemonthsof
June,July,andAugust.
AnalysisComponent
2.Thepurchasesbudgetsinpart(1)shouldreflectfewerpurchasesoftheOozySquirterinJune
comparedtothoseinJuly.Whatfactorcausedfewerpurchasestobeplanned?Suggestbusiness
conditionsthatwouldcausethisfactortobothoccurandimpactthiscompanyinthisway.
PROBLEM232C
DuringthelastweekofAugust,theownerofRapidRiverCompanyapproachesthebankfora
$180,000loantobemadeonSeptember1andrepaidonNovember30withannualinterestof
9%,foraninterestcostof$4,050.Theownerplanstoincreasethestoresinventoryby$135,000
duringSeptemberandneedstheloantopayforinventoryacquisitions.Thebanksloanofficer
needsmoreinformationaboutRapidRiversabilitytorepaytheloanandaskstheownerto
forecastthestoresNovember30cashposition.OnSeptember1,RapidRiverisexpectedto
have a $48,000 cash balance, $192,000 of accounts receivable, and $165,000 of accounts
payable.Itsbudgetedsales,merchandisepurchases,andvariouscashdisbursementsforthenext
threemonthsfollow:
SeptemberOctoberNovember
Sales$300,000$350,000$420,000
Merchandisepurchases280,000220,000250,000
CashDisbursements
Payroll25,00025,00025,000

Rent6,0006,0006,000
Othercashexpenses15,00018,00012,000
Repaymentofbankloan180,000
Interestonbankloan4,050
ThebudgetedSeptembermerchandisepurchasesincludetheinventoryincrease.Allsalesareon
account.Companyexperienceshowsthat30%ofcreditsalesiscollectedinthemonthofthe
sale,40%inthemonthfollowingthesale,15%inthesecondmonth,10%inthethird,andthe
remaining5%isuncollectible.ApplyingthesepercentstotheSeptember1accountsreceivable
balance, forexample, shows that $105,000 ofthe $192,000will be collected in September,
$52,000inOctober,and$28,000inNovember.Allmerchandiseispurchasedoncredit;seventy
percentofthebalanceispaidinthemonthfollowingapurchase,andtheremaining30%ispaid
inthesecondmonth.Forexample,ofthe$165,000ofaccountspayableattheendofAugust,
$115,500willbepaidinSeptemberand$49,500inOctober.
Required
PrepareacashbudgetforSeptember,October,andNovemberforRapidRiverCompany.Show
supportingcalculationsasneeded.
PROBLEM233C
OTWInc.sellsitsproductfor$50perunit.Itsactualandprojectedsalesfollow:
Units
July(actual)
600$30,000
August(actual) 750
37,500
September(budgeted)
900
45,000
October(budgeted)
800
40,000
November(budgeted)
650
32,500
Allsalesareoncredit.Recentexperienceshowsthat30%ofcreditsalesiscollectedinthe
monthofthesale,50%inthemonthafterthesale,andtheremaining20%inthesecondmonth
afterthesale.UncollectibleaccountshavebeennonexistentsinceBurttheBikerwashiredto
supervisecollections. Thepurchasepriceoftheproductis$30perunit.Allpurchasesare
payablewithin10days.Thus,80%ofpurchasesmadeinamonthispaidinthatmonthandthe
other20%ispaidinthenextmonth.OTWsmanagementhasapolicytomaintainanending
monthly inventory of 40% of the next months unit sales plus a safety stock of 30 units.
Inventorylevelshavebeenconsistentwiththispolicy.Sellingandadministrativeexpensesfor
theyearare$216,000andarepaidevenlythroughouttheyearincash.Thecompanysminimum
cashbalancefortheendofamonthis$20,000.Thisminimumismaintained,ifnecessary,by
borrowingcashfromthebank.Ifthebalanceexceeds$20,000,thecompanyrepaysasmuchof
theloanasitcanwithoutgoingbelowtheminimum.Thistypeofloancarriesanannual12%
interestrate.OnSeptember30,theloanbalanceis$44,000,andthecompanyscashbalanceis
$10,000.

Required
1.Prepareatablethatshowsthecomputationofcashcollectionsofitscreditsales(accounts
receivable)ineachofthemonthsofSeptemberandOctober.
2.Prepareatablethatshowsthecomputationofbudgetedendinginventories(inunits)forJuly,
August,September,andOctober.
3.Prepare the merchandise purchases budget for August, September, and October. Present
calculationsinunitsandthenshowthedollaramountofpurchasesforeachmonth.
4.Prepare a table showing the computation of cash payments on product purchases for
SeptemberandOctober.
5.PrepareacashbudgetforSeptemebrandOctober,includinganyloanactivityandinterest
expense.Computetheloanbalanceattheendofeachmonth.
AnalysisComponent
6.Refertoyouranswertopart5.OTWscashbudgetindicatesthecompanywillneedtoborrow
morethan$10,000inSeptember.SuggestsomereasonsthatknowingthisinformationinAugust
wouldbehelpfultomanagement.
PROBLEM234C
EvaCompany,aoneproductmailorderfirmbuysitsproductfor$100andsellsitfor$350.The
salesstaffreceivesa20%commissiononthesaleofeachunit.ItsMarchincomestatement
follows:
EVA COMPANY
IncomeStatement
ForMonthEndedMarch31,2008

Sales
$175,000
Costofgoodssold

50,000
Grossprofit
$125,000
Expenses
Salescommissions(20%)35,000
Advertising
5,000
Storerent
8,000
Otherexpenses

15,000
Totalexpenses
$63,000
Netincome
$62,000

The company expects Marchs results to be repeated in April, May, and June without any
changesinstrategy.Management,howeverhasanalternativeplan.Itbelievesthatunitsaleswill
increaseatarateof10%eachmonthforthenextthreemonths(beginningwithApril)ifthe
sellingpriceisreducedto$320perunitandadvertisingexpensesareincreasedby25%and

remainatthatlevelforallthreemonths.Thecostoftheproductwillremainat$100perunit,the
salesstaffwillcontinuetoearna20%commission,andtheremainingexpenseswillstaythe
same.
Required
1.PrepareabudgetedincomestatementforeachofthemonthsofApril,May,andJunethat
showstheexpectedresultsfromimplementingtheproposedchanges.Useathreecolumnformat
withonecolumnforeachmonth.
AnalysisComponent
2.Usethebudgetedincomestatementfrompart1torecommendwhetherthecompanyshould
implementtheproposedchanges.Explain.
PROBLEM235C
Neartheendof2008,themanagementofLeClairCo.,amerchandisingcompany,preparedthe
followingestimatedbalancesheetforDecember31,2008:

Assets
Cash
Accountsreceivable
Inventory
Totalcurrentassets
Equipment
Lessaccum.Depre.
Totalassets

LECLAIRCOMPANY
EstimatedBalanceSheet
December31,2008
$42,000
497,000
150,000

$689,000
$360,000
40,000

320,000
$1,009,000

LiabilitiesandEquity
Accountspayable
$240,000
Bankloanpayable
10,000
Taxespay.(3/15/2003)
75,000
Totalliabilities
$325,000
Commonstock
450,000
Retainedearnings
234,000

Totalstockholdersequity
684,000

Totalliabilitiesandequity$1,009,000
ToprepareamasterbudgetforJanuary,February,andMarchof2009,managementgathersthe
followinginformation:

a. LeClairs single product is purchased for $25 per unit and resold for $60 per unit. The
expected inventory level of6,000units onDecember 31,2008,is morethanmanagements
desiredlevelfor2009,whichis25%ofthenextmonthsexpectedsales(inunits).Expected
salesare:January,7,500units;February,8,000units;March,9,500units;andApril,8,000units.
b. Cashsalesandcreditsalesrepresent20%and80%,respectively,oftotalsales.Ofthecredit
sales,50%iscollectedinthefirstmonthafterthesaleand50%inthesecondmonthafterthe
sale.FortheDecember31,2008,accountsreceivablebalance,$192,000willbecollectedin
Januaryandtheremaining$305,000willbecollectedinFebruary.
c. Merchandisepurchasesarepaidforasfollows:40%inthemonthafterpurchaseand60%in
thesecondmonthafterpurchase.FortheDecember31,2008,accountspayablebalance,$60,000
willbepaidinJanuaryandtheremaining$180,000willbepaidinFebruary.
d. Sales commissions equal to 10% of sales are paid each month. Sales salaries (excluding
commissions)are$50,000permonth.
e. General and administrative salaries are $168,000 per year. Maintenance expense equals
$2,500permonthandispaidincash.
f. EquipmentreportedintheDecember31,2008,balancesheetwaspurchasedinJanuary2008.
Itisbeingdepreciatedovernineyearsunderthestraightlinemethodwithnosalvagevalue.The
followingamountsfornewequipmentpurchasesareplannedinthecomingquarter:January,
$27,000;February,$108,000;andMarch,$36,000.Thisequipmentwillbedepreciatedunderthe
straightlinemethodovernineyearswithnosalvagevalue.Afullmonthsdepreciationistaken
forthemonthinwhichequipmentispurchased.
g. ThecompanyplanstoacquirelandattheendofMarchatacostof$200,000,whichwillbe
paidwithcashonthelastdayofthemonth.
h. LeClairhasaworkingarrangementwithitsbanktoobtainadditionalloansasneeded.The
interestrateis10%peryear,andtheinterestispaidattheendofeachmonthbasedonthe
beginningbalance.Partialorfullpaymentsontheseloanscanbemadeonthelastdayofthe
month.Thecompanyhasagreedtomaintainaminimumendingcashbalanceof$15,000ineach
month.
i. Theincometaxrateforthecompanyis40%.Incometaxesonthefirstquartersincomewill
notbepaiduntilApril15.
Required
Prepare a master budget for each of the first three months of 2009; include the following
componentbudgets(showsupportingcalculationsasneeded,androundamountstothenearest
dollar):
1.Monthlysalesbudgets(showingbothbudgetedunitsalesanddollarsales).
2.Monthlymerchandisepurchasesbudgets.
3.Monthlysellingexpensebudgets.
4.Monthlygeneralandadministrativeexpensebudgets.
5.Monthlycapitalexpendituresbudgets.
6.Monthlycashbudgets.
7.Budgetedincomestatementfortheentirefirstquarter(notforeachmonth).
8.BudgetedbalancesheetasofMarch31,2009.

PROBLEM236C
TheRockyMountainCompanyproducessnowboards.Eachsnowboardrequiressixpoundsof
carbonfiber.Thecompanysmanagementpredictsthat3,200snowboardsand2,000poundsof
carbonfiberwillbeininventoryMarch31ofthecurrentyearandthat9,600snowboardswillbe
soldduringthenext(second)quarter.Managementwantstoendthesecondquarterwithonly
800snowboardsand1,200poundsofcarbonfiberonhand.Carbonfibercanbepurchasedfor
$6.00perpound.
Required
1.Preparethesecondquarterproductionbudgetforboomerangs.
2.Preparethesecondquarterdirectmaterials(carbonfiber)budget;includethedollarcostof
purchases.