Haley Company estimates its sales at 100,000 units in the first quarter and that sales will increase by 10,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $35. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale.
Cash collections for the third quarter are budgeted at
A) $2,373,000.
B) $3,444,000.
C) $4,137,000.
D) $4,788,000.

Question

Quizplus · Accepted Answer

Step 1: Calculate the expected sales each quarter:
Q1 sales = 100,000 units
Q2 sales = 100,000 + 10,000 = 110,000 units
Q3 sales = 110,000 + 10,000 = 120,000 units
Q4 sales = 120,000 + 10,000 = 130,000 units

Step 2: Calculate the total sales for the year (including the desired ending inventory):
Total sales = (100,000+110,000+120,000+130,000) + (0.25*130,000) = 487,500

Step 3: Calculate the cash sales and credit sales for each quarter:
Cash sales = 0.4 * (Q1 sales + Q2 sales + Q3 sales + Q4 sales) = 0.4 * (100,000+110,000+120,000+130,000) = $108,000
Credit sales = Total sales - Cash sales = $379,500

Step 4: Calculate the collections for each quarter:
Q1 collections = 0
Q2 collections = 0.7 * (Credit sales from Q1) + 0.3 * (Credit sales from Q2) = 0.7 * (271,500) + 0.3 * (128,000) = $227,350
Q3 collections = 0.7 * (Credit sales from Q2) + 0.3 * (Credit sales from Q3) = 0.7 * (281,500) + 0.3 * (138,000) = $246,350
Q4 collections = 0.7 * (Credit sales from Q3) + 0.3 * (Credit sales from Q4) = 0.7 * (291,500) + 0.3 * (148,000) = $265,350

Step 5: Add up the cash collections for all quarters:
Cash collections = Q1 collections + Q2 collections + Q3 collections + Q4 collections = $0 + $227,350 + $246,350 + $265,350 = $739,050
Note: This is only the amount of cash collected from credit sales. We already calculated the cash collected from cash sales in Step 3.

Step 6: Add the cash collected from cash sales to the cash collected from credit sales:
Total cash collections = Cash sales + Cash collections from credit sales = $108,000 + $739,050 = $847,050

Therefore, the correct choice is C ($4,137,000).

Haley Company Estimates Its Sales at 100,000 Units in the First