Rotech Co. began operations in January 2011. The information below is for Rotech Co.'s operations for the three months from January to March (the first quarter) of 2012:
Expenses for Quarter 1
Depreciation ............................................ $35,000
Factory overhead ........................................ 15,000
Income taxes ............................................. 25,000
Payroll .................................................... 29,000
Selling costs (2% commission on sales) ............. 12,000
Administrative costs ................................... 15,000
Costs are assumed to be incurred evenly throughout the year, with the exception of depreciation and income taxes. Depreciation on new assets is first taken in the quarter after the quarter in which they are purchased. Income taxes are payable in semi-annual installments on the first day of each six-month period, based on last year's actual taxes of $30,000. Other information:
1. Sales (made evenly throughout the quarter)
Quarter 1 ........................ (Actual) ...................... $600,000
Quarter 2 ...................... (Forecast) ........................ 400,000
Quarter 3 ...................... (Forecast) ........................ 800,000
Collections from sales are as follows: 50% in the quarter of sale; 45% in the following quarter; 5% uncollectible.
2. Purchases (made evenly throughout the quarter)
Quarter 1 ...................... (Actual) ...................... $300,000
The gross margin ratio is constant at 40%.
Cash payments for purchases are as follows: 50% in the quarter of purchase; 50% in the following quarter. Merchandise purchased during a quarter would include 25% of the next quarter's forecasted sales.
3. The company purchased capital equipment for $150,000 in February 2011. The estimated useful life of this equipment is 10 years; it has no estimated scrap value.
4. Dividends of $20,000 are declared on the last day of each quarter and are paid at the end of the next month.
5. The cash balance in the bank at the end of the first quarter is $45,000.
Instructions
(a) Prepare a cash budget for Rotech Co. for the second quarter of 2012. Show all your supporting calculations.
(b) List three advantages of budgeting?