You have just been hired as a new management trainee by AceWholesale, Inc a distributor of

brooms to various retail outlets located in shopping mallsacross the country. In the past, the

company has done very little in the way of budgeting and atcertain times of the year has

experienced a shortage of cash. Since you are well trained inbudgeting, you have decided to prepare comprehensive budgets forthe upcoming second quarter in order to show management thebenefits that can be gained from an integrated budgeting program.To this end, you have worked with accounting and other areas togather the information assembled below. The company sells manystyles of brooms, but all are sold for the same price—$10 perunit.

Actual sales of brooms for the last three months and budgetedsales for the next six months follow (in units of brooms):

January (actual) 20,000

February (actual) 24,000

March (actual) 40,000

April (budget) 100,000

May (budget) 160,000

June (budget) 90,000

July (budget) 80,000

August (budget) 36,000

September (budget) 32,000

The concentration of sales before and during May is due toGraduation Days. Sufficient inventory should be on hand at the endof each month to supply 45% of the bracelets sold in the followingmonth. Suppliers are paid $4 for a broom. One-half of a month’spurchases is paid for in the month of purchase; the other half ispaid for in the following month. All sales are on credit, with nodiscount, and payable within 15 days. The company has found,however, that only 22% of a month’s sales are collected in themonth of sale. An additional 70% is collected in the followingmonth, and the remaining 8% is collected in the second monthfollowing sale. Monthly operating expenses for the company aregiven below:

Variable:

Sales commissions 5% of Sales

Fixed:

Advertising $200,000

Rent $18,000

Salaries $106,000

Utilities $7,000

Insurance $3,000

Depreciation $14,000

Insurance is paid on an annual basis, in November of eachyear.

The company plans to purchase $16,000 in new equipment duringMay and $40,000 in new

equipment during June; both purchases will be for cash. Thecompany declares dividends of

$15,000 each quarter, payable in the first month of thefollowing quarter.

The company’s balance sheet at March 31 is givenbelow:

Assets

Cash $74,000

Accounts receivable (net) 331,200

Inventory 180,000

Prepaid insurance 21,000

Property and equipment (net) 950,000

Total assets $1,556,200

Liabilities and Stockholders’ Equity

Accounts payable $134,000

Dividends payable 15,000

Common stock 800,000

Retained earnings 607,200

Total liabilities and stockholders’ equity $1,556,200

The company maintains a minimum cash balance of $50,000. Allborrowing is done at the

beginning of a month; any repayments are made at the end of amonth.

The company has an agreement with a bank that allows the companyto borrow in increments of

$1,000 at the beginning of each month. The interest rate onthese loans is 1% per month and for

simplicity we will assume that interest is not compounded. Atthe end of the quarter, the

company would pay the bank all of the accumulated interest onthe loan and as much of the loan

as possible (in increments of $1,000), while still retaining atleast $50,000 in cash.

Required:

Prepare a master budget for the three-month period ending June30. Include the following

detailed budgets:

* A merchandise purchases budget in units and in dollars. Showthe budget by month and in total?

* A schedule of expected cash disbursements for merchandisepurchases, by month and in total?

* A cash budget. Show the budget by month and in total.Determine any borrowing that would be needed to maintain theminimum cash balance of $50,000?