Walker Products fell behind in paying its vendors, and it now has a poor credit rating. Consequently, all suppliers demand cash on delivery (even employees are paid on a daily basis). The firm has a note payable on which principal payments have been suspended. The firm must pay interest on this note at the rate of 1.5% of the beginning of the balance. If Walker misses even one interest payment, the bank will initiate bankruptcy proceedings. The following is Walker’s balance sheet as of October 1.
Assets Liabilities and Equity
Cash $7,000 Notes Payable
Accounts receivable(net) 24,000 Common Stock 75,000
Inventory 39,000 Retained earnings(deficit) (15,000)
Plant and equipment(net) 80,000 Total liabilities and equity $150,000
Total assets $150,000
Walker sells its products for $25 per unit. The purchase cost is $15 per unit. Budgeted sales for October are 2,500 units, and ending budgeted inventory is 2,000 units. Typically, 60% of Walker’s customers pay in the month of sales, 35% in the month following purchase, and 5% never pay.
Walker’s employess are paid strictly on commission based on 10% of sales. The firm depreciates its fixed assets at the rate of $2,000 per month. All other selling and administrative costs amount to $15,000 per month.
A.)Prepare a cash receipts and disbursements budget for October.
B.)Prepare a budgeted income statement for October.
C.)Prepare the budgeted balance sheet as of the end of October.
D.)Is the firm operating at a profit or loss? What level of sales is needed to break even? (Hint: Treat commissions and expected bad debts as variable costs.)
Taken from the textbook, Cost Management, 2nd edition Chapter 10(Problem 10.36), a blue text book