Mountain Mash produces ice cream for wholesale distribution to grocers, restaurants, and independent ice cream shops. March, April, May, June, and July are busy months for the company as its customers gear up for the spring and summer rush. Mountain Mash has projected the following level of sales (in gallons) for March through July:
The company has a set wholesale selling price of $3.50 per gallon. Mountain Mash's customers purchase ice cream on credit, with the agreement that they must pay invoices within 30 days. Nonetheless, not all customers pay within that time frame. Mountain Mash's credit manager has developed the following table to show the typical cash collection pattern:
- 70 percent of sales are collected in the month of sale
- 25 percent of sales are collected in the month following the month of sale
- 5 percent of sales are collected in the second month following the month of sale.
A. Prepare a sales budget for March, April, May, June, and July
B. Prepare a cash receipts budget for May, June and July. Be sure to remember the cash collections for the month prior to May.
C. If sales and cash collection are exactly as the company estimates how much will the customers owe Mountain Mash at the end of July?
Sales budget and budget receipts from customers
The sales budget contains details of the estimated sales units and sales revenue from customers for the period, while the cash budget will include the budgeted collections from clients. The sales revenue and collections will not be the same because credit sales are often collected in later periods.
Answer and Explanation:
Sales budget for March - July
|Estimated sales units (gallons)||70,000||80,000||85,000||90,000||92,000|
|Estimated sales revenue ($3.50 per gallon)||$245,000||$280,000||$297,500||$315,000||$322,000|
B. The budgeted cash collections will be:
|Estimated sales revenue||$297,500||$315,000||$322,000|
|...70% of this month's sales||$208,250||$220,500||$225,400|
|...25% of last month's sales||70,000 ($280,000 x 0.25)||74,375||78,750|
|...5% of two months ago's sales||12,250 ($245,000 x 0.05)||14,000||14,875|
|Budgeted cash receipts||$290,500||$308,875||$319,025|
C. The Accounts Receivable balance at the end of July will be:
|5% of June sales outstanding||$15,750|
|30% of July sales outstanding||96,600|
|Balance of Accounts Receivable||$112,350|
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from Accounting 301: Applied Managerial AccountingChapter 11 / Lesson 4
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