You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2399545 • Letter: Y
Question
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.
The company sells many styles of earrings, but all are sold for the same price—$16 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):
The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.
Suppliers are paid $5.70 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $24,500 in new equipment during May and $57,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,750 each quarter, payable in the first month of the following quarter.
The company’s balance sheet as of March 31 is given below:
The company maintains a minimum cash balance of $67,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $67,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $67,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.
January (actual) 23,400 June (budget) 53,400 February (actual) 29,400 July (budget) 33,400 March (actual) 43,400 August (budget) 31,400 April (budget) 68,400 September (budget) 28,400 May (budget) 103,400Explanation / Answer
2.
281402
a Jan Feb Mar April May June July Total For April to June Expected Sales in Units 23400 29400 43400 68400 103400 53400 33400 225200 Exected Sales in $ @ $16 374400 470400 694400 1094400 1654400 854400 534400 3603200 In $ b Expected Collections 20% 218880 330880 170880 720640 70% 486080 766080 1158080 2410240 10% 47040 69440 109440 225920 Budgetted Receipts from Creditors 752000 1166400 1438400 3356800 c PRODUCTION BUDGET In Units Opening Inventory 17360 27360 41360 21360 90080 Closing Inventory 17360 27360 41360 21360 13360 76080 Production Sales + Closing - Opening) 53400 82400 83400 45400 211200 Purchase Cost $ 5.70 304380 469680 475380 258780 1203840 In $ d Cash Payment to Supliers 50% 234840 237690 129390 601920 50% 152190 234840 237690 624720 Total 387030 472530 367080 1226640Related Questions
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