Question

Aztec Company sells its product for $180 per unit. Its actual and budgeted sales follow. Units Dollars April (actual) 4,000 $ 720,000 May (actual) 2,000 360,000 June (budgeted) 6,000 1,080,000 July (budgeted) 5,000 900,000 August (budgeted) 3,800 684,000 All sales are on credit. Recent experience shows that 20% of credit sales is collected in the month of the sale, 50% in the month after the sale, 28% in the second month after the sale, and 2% proves to be uncollectible. The product’s purchase price is $110 per unit. 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 20% of the next month’s unit sales plus a safety stock of 100 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,320,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $100,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $100,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 12% interest rate. On May 31, the loan balance is $25,000, and the company’s cash balance is $100,000.

Answer 1

Solution:

1.  Aztec Company

Cash Receipts Schedule

                                                                  June   July

Projected sales                            $1,080,000    $900,000

Projected cash collections:  

Collected from April sales

27% in Jun                                      $194,400  

Collected from May sales

42% in Jun; 27% in Jul                        147,840  $95,040

Collected from Jun sales

28% in Jun; 42% in Jul                       224,000  336,000

Collected from Jul sales

28% in Jul                                                    223,720

Total cash receipts                   $566,240 $654,760

2.

Aztec Company

Schedule of Budgeted ending inventories

                                                        April May      June     July

Following month's sales units 2,200 5,000 4,000 3,000

18% of following month's sales units 396    900 720           540

Safety stock                                      180   180 180         180

Desired ending inventory             576 1,080 900          720

3. Aztec Company

Merchandise Purchases Budget

                                                                        May   June July

Units needed for current month's sales 2,200 5,000 4,000

Desired ending inventory                        1,080 900  720

Units required                                        3,280 5,900 4,720

Beginning inventory                                (576)      (1,080) (900)

Units to be purchased                                  2,704 4,820 3,820

Purchase price per unit                                  $110 $110  $110

Merchandise to be purchased $297,440 $530,200 $420,200

4. Aztec Company

Cash Payments for Product Purchases

                                                                    June     July

Direct materials purchases             $530,200 $420,200

Payments for purchases:  

60% of this month's purchases            $318,120 $252,120

40% of first month's purchases             118,976 212,080

Expected payments for direct materials  $437,096 $464,200

5. Aztec Company

Cash Budget

                                                                                  June     July

Cash balance, beginning                             $120,000 $120,000

Total cash receipts                                     566,240 654,760

Total cash available                                     $686,240 $774,760

Cash Disbursements  

Cash payments for merchandise purchases  437,096   464,200

Selling and administrative expenses

(= $1,584,000 / 12 per month)                        132,000 132,000

Excess (deficiency) of cash

available over disbursements                         $117,144 $178,560

Financing:  

Borrowings 3,284  

Repayments (at ending)  (43,247)

($42,784 + $463)

Interest (428)

($39,500 x 0.13 = $5,135 / 12) (463)

($42,784 x 0.13 = $5,562 / 12)

Total Financing $2,856 $43,680