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Mountain Mash produces ice cream for wholesale distribution to grocers, restaurants, and...

Question:

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:

Month Units Month Units
March 70,000 June 90,000
April 80,000 July 92,000
May 85,000

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:


A.

Mountain Mash

Sales budget for March - July

March April May June 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:

May June July
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

Learn more about this topic:

Sales Budget: Definition & Examples

from Accounting 301: Applied Managerial Accounting

Chapter 11 / Lesson 4
7.6K

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