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Question(s) / Instruction(s):

Abacus Company sells its product for $220 per unit. Its actual and projected sales follow.

 

                                                                                Units                     Dollars

  April (actual)                                                    8,500                     $ 1,870,000  

  May (actual)                                                     3,000                     660,000  

  June (budgeted)                                            6,500                     1,430,000  

  July (budgeted)                                              5,500                     1,210,000  

  August (budgeted)                                       4,300                     946,000  

 

All sales are on credit. Recent experience shows that 24% of credit sales is collected in the month of the sale, 46% in the month after the sale, 24% in the second month after the sale, and 6% proves to be uncollectible. The product’s purchase price is $110 per unit. All purchases are payable within 13 days. Thus, 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 22% of the next month’s unit sales plus a safety stock of 105 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,932,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $88,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $88,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 13% interest rate. On May 31, the loan balance is $33,000, and the company’s cash balance is $88,000.

Required:

  1. Prepare a table that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July
  2. Prepare a table that shows the computation of budgeted ending inventories (in units) for April, May, June, and July.
  3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month
  4. Prepare a table showing the computation of cash payments on product purchases for June and July
  5. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.

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