1. 10-26 Budgeted Cash Receipts and Cash Disbursements Timpco, a retailer, makes both cash and credit sales (i.e., sales on open account). Information regarding budgeted sales for the last quarter of the year is as follows: October November December C

1. 10-26 Budgeted Cash Receipts and Cash Disbursements Timpco, a retailer, makes both cash and credit sales (i.e., sales on open account). Information regarding budgeted sales for the last quarter of the year is as follows: October November December Cash sales $100,000 $120,000 $80,000 Credit sales 100,000 150,000 90,000 Total $200,000 $270,000 $170,000 Past experience shows that 5 percent of credit sales are uncollectible. Of the credit sales that are collectible, 60 percent are collected in the month of sale; the remaining 40 percent are collected in the month following the month of sale. Customers are granted a 1.5 percent discount for payment within 10 days of billing. Approximately 75 percent of collectible credit sales take advantage of the cash discount. Inventory purchases each month are 100 percent of the cost of the following month’s projected sales. (The gross profit rate for Timpco is approximately 30 percent.) All merchandise purchases are made on credit, with 25 percent paid in the month of purchase and the remainder paid in the following month. No cash discounts for early payment are available. Required 1. Calculate the budgeted total cash receipts for November and December. 2. Calculate budgeted cash disbursements for November and December (budgeted total sales for January of the coming year equal $200,000). 10-34 Budgeting for Marketing Expenses; Strategy You have been recruited by a former classmate, Susanna Wu, to join the finance team of a company that she founded recently. The company produces a unique product line of hypoallergenic cosmetics and relies for its success on an aggressive marketing program. The company is in a start-up phase and therefore has no significant history of expenses and revenues upon which to rely for budgeting and planning purposes. Given the restriction on available funds (most of the available capital has been used for new-product development and to recruit a management team), the control of costs, including marketing costs, is thought by the management team to be essential for the short-term viability of the company. You have held a number of intensive discussions with Susanna and John Thompson, director of marketing for the firm. They have asked you to prepare an estimated budget for marketing expenses for a month of operations. You are provided with the following data, which represent average actual monthly costs over the past three months: Cost Amount Sales commissions $120,000 Sales staff salaries 40,000 Telephone and mailing 38,000 Rental—office building 25,000 Gas (utilities) 12,000 Delivery charges 70,000 Depreciation—office furniture 8,000 Marketing consultants 25,000 Your discussions with John and Susanna indicate the following assumptions and anticipated changes regarding monthly marketing expenses for the coming year: • Sales volume, because of aggressive marketing, should increase by 10 percent. • To meet competitive pressures, sales prices are expected to decrease by 5 percent. • Sales commissions are based on a percentage of sales revenue. • Sales staff salaries, because of a new hire, will increase by 10 percent, regardless of sales volume. • Because of recent industrywide factors, rates for telephone and mailing costs, as well as delivery charges, are expected to increase by 6 percent. However, both of these categories of costs are variable with sales volume. • Rent on the office building is based on a two-year lease, with 18 months remaining on the original lease. • Gas utility costs are largely independent of changes in sales volume. However, because of industrywide disruptions in supply, these costs are expected to increase by 15 percent, regardless of changes in sales volume.Page 0405 • Depreciation on the office furniture used by members of the sales staff should increase because of new equipment that will be acquired. The planned cost for this equipment is $30,000, which will be depreciated using the straight-line (SL) method, with no salvage value, over a five-year useful life. • Because of competitive pressure, the company plans to increase the cost of marketing consultants by $5,000 per month. Required 1. Use the preceding information to develop an Excel spreadsheet that can be used to generate a monthly budget for marketing expenses. (Use the built-in function “SLN” to calculate monthly depreciation charges for the new equipment to be purchased.) What is the percentage change, by line item and in total, for items in your budget? 2. The management team is worried about the short-term financial position of the new company. Given the strain on available cash, the president has expressed a desire to keep marketing expenses over the next few months to a maximum of $350,000. Discussions with the marketing department indicate that telephone and mailing costs are the only category, in the short run, that can reasonably bear the planned-for reduction in marketing costs. The budget you have prepared includes an assumed 6 percent increase in telephone and mailing costs. What must this percentage change (positive or negative) be in order to achieve targeted monthly marketing costs? (Hint: Use the Goal Seek function in Excel, which is found under Data, then What-If Analysis.) 3. Comment on the use of the budget in this situation for cost-control purposes. 10-40 Budgeting for a Service Firm Refer to the AccuTax Inc. example in the chapter. One of the partners is planning to retire at the end of the year. May Higgins, the sole remaining partner, plans to add a manager at an annual salary of $90,000. She expects the manager to work, on average, 45 hours a week for 45 weeks per year. She plans to change the required staff time for each hour spent to complete a tax return to the following: Business Return Complex Individual Return Simple Individual Return Partner 0.3 hour 0.05 hour — Manager 0.2 hour 0.15 hour — Senior consultant 0.5 hour 0.40 hour 0.2 hour Consultant — 0.40 hour 0.8 hour The manager is salaried and earns no overtime pay. Senior consultants are salaried but receive time and a half for any overtime worked. The firm plans to keep all the senior consultants and adjust the number of consultants as needed including employing part-time consultants, who also are paid on an hourly basis. Higgins has also decided to have five supporting staff at $40,000 each. All other operating data remain unchanged. The manager will share 10 percent of any profit over $500,000 before bonus. Required 1. What are the budgeted total costs for overtime hours worked by senior consultants? 2. How many full-time consultants should be budgeted? 3. Determine the manager’s total compensation and total pretax operating income for the firm, assuming that the revenues from preparing tax returns remain unchanged.