Quick Flik Company Master Budget Project You Have Just Been

Quik Flik Companymaster Budget Projectyou Have Just Been Hired

You have just been hired as a new management trainee by Quik-Flik Company, a nationwide distributor of a revolutionary new cigarette lighter. Your first assignment is to prepare a master budget for the next three months, starting April 1, 2006. The budget includes sales, purchases, inventory, operating expenses, cash collections and payments, borrowing, and the balance sheet, culminating in a comprehensive financial plan for April through June 2006.

The company forecasts sales to be 35,000 units in April, 45,000 units in May, and 60,000 units in June, with each lighter selling at $8. All sales are on credit, and the collection pattern is 25% in the month of sale, 50% in the following month, and 25% in the second month after sale. Cost per lighter is $5, and the desired ending inventory for each month equals 90% of the next month's forecasted sales in units, with the inventory valued at cost.

Operating expenses include variable sales commissions of $1 per lighter, fixed wages and salaries of $22,000, utilities of $14,000, insurance expenses of $1,200 (which expire monthly), depreciation of $1,500, and miscellaneous expenses of $3,000. The company plans to purchase new fixed assets for $25,000 cash in May and pays dividends of $12,000 each quarter at the beginning of the next quarter.

Cash payments for purchases are split 50% in the month of purchase and 50% in the following month. Expenses are paid in cash during the month, except for depreciation and insurance. The company maintains a minimum cash balance of $10,000 and can borrow at 12% annual interest, with principal repayments rounded to the nearest $1,000 at month-end. Borrowing is only allowed at the beginning of each month, and interest is paid quarterly, calculated on the outstanding balance. Excess cash is used to pay off loans as quickly as possible.

The opening balance sheet as of March 31, 2006, provides the starting point, with assets including cash, accounts receivable, inventory, insurance, and fixed assets; liabilities comprising accounts payable, dividends payable, and no short-term notes; and equity consisting of capital stock and retained earnings. Income taxes are ignored for budgeting purposes.

Paper For Above instruction

Introduction

Master budgeting is a crucial component of financial planning for any enterprise, serving as a comprehensive blueprint that integrates various subsidiary budgets into a cohesive financial plan. The Quik-Flik Company, a distributor of an innovative cigarette lighter, requires meticulous preparation of its master budget to ensure operational efficiency, liquidity management, and strategic financial planning for the upcoming quarter. This paper presents a detailed formulation of Quik-Flik’s master budget for April through June 2006, considering sales forecasts, inventory management, cost controls, cash flow management, and financing activities.

Sales Budget

The sales forecast for the quarter is based on projected units sold for April (35,000 units), May (45,000 units), and June (60,000 units), each at a price of $8 per lighter. Total sales revenue is computed as units sold multiplied by unit price, providing the sales target for each month and the quarter as a whole. This projection lays the foundation for production planning, inventory control, and cash collections.

Cost of Goods Sold and Inventory

The cost per lighter is set at $5. The ending inventory for each month equals 90% of the subsequent month’s forecasted sales in units, valued at cost. Beginning with the March 31 inventory balance of 31,500 units, the month-by-month calculations determine the required purchases to meet both sales and inventory requirements.

For example, April’s ending inventory is 90% of May sales units (40,500 units), which influences April's ending inventory and purchase calculations. The purchases for each month are derived from the sum of projected sales and desired ending inventory minus beginning inventory, adjusting for the inventory already on hand.

Operating Expenses and Variable Costs

Variable operating expenses include sales commissions at $1 per lighter sold each month. Fixed expenses comprise wages ($22,000), utilities ($14,000), insurance expenses ($1,200), depreciation ($1,500), and miscellaneous costs ($3,000). The total operating expenses for each month are thus calculated by summing these fixed and variable amounts based on the sales volume.

Cash Collections and Payments

Cash inflows from credit sales are estimated using the collection pattern: 25% in the same month, 50% in the following month, and 25% in the second subsequent month. These collections inform cash receipts for each period, considering the actual sales forecast.

Cash outflows for purchases follow a 50-50 split between the purchase month and the prior month. Operating expenses are paid entirely in cash during the respective month, except for depreciation and insurance, which are non-cash charges.

Cash Budget and Financing

The cash budget accounts for beginning cash, inflows from collections, outflows from purchases and operating expenses, capital expenditures, dividends, and financing activities. A minimum cash balance of $10,000 is maintained, with borrowings enacted at the start of a month if the cash balance falls below this threshold. Borrowed amounts are rounded to the nearest thousand, with interest calculated at 12% annually on outstanding balances, paid quarterly. Principal repayments are scheduled at month's end, again rounded to the nearest thousand.

In May, the company plans to purchase fixed assets for $25,000, funded through cash or borrowing. Dividends of $12,000 are paid at the beginning of each quarter, with the current quarter's dividends payable balanced accordingly.

Projected Financial Statements and Final Budget

The comprehensive master budget consolidates sales, purchases, operating expenses, cash flows, and financing activities to generate projected income statements, cash budgets, and balance sheets for April, May, and June 2006. The focus lies in maintaining liquidity, controlling costs, and ensuring operational efficiency aligned with strategic goals.

Conclusion

Effective master budgeting enables Quik-Flik Company to anticipate cash needs, optimize inventory levels, control expenses, and strategize financing to support growth. The detailed budgeting process not only provides clarity on expected financial performance but also equips management with actionable insights to navigate the challenges of rapid expansion and market demands.

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