Question 3 (7 marks)

a) Explain how a flexible budget can be of value to businesses. (2 marks)

b) Beauty Spa & Co. manufactures a specialised luxury spa that is supplied to five-star hotels around the country. The owner provides you with the following information to prepare its 1^st quarter budget: July, August, and September. Budgeted sales are as follows:

Month	Sales ($)	Units Sold
May	25,000	250
June	28,000	280
July	30,000	300
August	40,000	400
September	35,000	350
October	37,000	370

Additional information:

i) Purchases are budgeted at $5.00 per unit and are paid for in full in the month after purchase.

ii) Closing inventory must equal 50% of the next months sales.

iii) Sales (which are all on credit) are collected as follows: 60% in the month of sale; 30% in the month after the sale; 5% in the second month after the sale.

iv) The balance in the bank account as of 30 June is $10,000.

Required (show your workings for each question):

1. Prepare a purchases budget (in units and $) for the 1^st quarter. (Purchases are based on expected sales). (3 marks)
2. Prepare the schedule of expected cash collections from Accounts Receivable for the months of July and August. (2 marks)