You have just been hired as a new management trainee by Earrings Unlimited, a di

Question

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earring 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 comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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- $13 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):
January (actual)... 22,400 June (budget)... 52,400 February (actual)... 28,400 July (budget)... 32,400 March (actual)... 42,400 August (budget) ... 30,400 April (budget)... 67,400 September (budget) 27,400 May (budget)... 102,400
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 $5.2 for a pair of earrings. One-half of a month?s purchases are paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that 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:
Variable: Sales commissions..................4% of sales
Fixed: Advertising.....................$320,000 Rent................................30,000 Salaries........................130,000 Utilities.........................13,000 Insurance......................4,200 depreciation.................26,000
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $22,000 in new equipment during May and $52,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $24,000 each quarter, payable in the first month of the following quarter.
A listing of the company?s ledger accounts as of March 31 is given below:
Assets Cash.............................................................................$ 86,000 Accounts Receivable($45,440February sales; $542,720 March Sales)................................. 588,160 Inventory...................................................................... 140,192 Prepaid insurance......................................................... 27,000 Property and equipment(net)....................................... 1,070,000 Total Assets................................................................. $1,911,352
Liabilities and Stockholders? Equity Accounts Payable.........................................................$ 112,000 Dividends Payable......................................................... 24,000 Capital stock................................................................. 1,040,000 Retained Earnings......................................................... 735,352 Total liabilities and stockholders? equity $1,911,352
The company maintains a minimum cash balance of $62,000. 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 $62,000 in cash.
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
Required Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 Variable expenses: Fixed expenses:

Explanation / Answer

The answer is at the end Schedule of Cash collection April May June Total July August Sales in units A 67400 102400 52400 222200 32400 30400 Sale Price 13 13 13 13 13 13 Sales in value 876200 1331200 681200 2888600 421200 395200 Feb sales 45440 45440 Marc sales (70%,10% of (542720/80%*100)) 474880 67840 542720 678400 April sales (20%,70%,10%) 175240 613340 87620 876200 May Sales 266240 931840 1198080 June sales 136240 136240 Total A 695560 947420 1155700 2798680 Accounts Receivable May 1331200*.1+June 681200*.8= 678080 Note 2 Purcahse Budget April May June Total July Units to be sold 67400 102400 52400 222200 32400 Closing Inventory 40% of next month sales S*.4 40960 20960 12960 12960 Total Finised Googd 108360 123360 65360 235160 Less: Beginning Inventory 26960 40960 20960 26960 Units to be produced 81400 82400 44400 208200 Purchase Price 5.2 5.2 5.2 5.2 Total Purchase price A 423280 428480 230880 1082640 COGS= Units sold*4 350480 532480 272480 1155440 Cash Disbursement Schedule From march purchases 112000 112000 From April Purchases 211640 211640 423280 From May Purchases 214240 214240 428480 From June purchases 115440 115440 Total B 323640 425880 329680 1079200 Accounts payable as on 30 June 115440 working Cash payments payment of Inventory 323640 425880 329680 1079200 Sales Commissions @ 4% 35048 53248 27248 115544 Advertising 320000 320000 320000 960000 Rent 30000 30000 30000 90000 Salaries 130000 130000 130000 390000 Utilities 13000 13000 13000 39000 Dividend Paid 24000 24000 Equipment purchased 22000 52000 74000 April May J June Total Beginning Cash balance 86000 $62,872 $62,164 86000 Cash receipt 695560 947420 1155700 2798680 Total cash available 781560 1010292 1217864 2884680 Less: Cash Disbursements payment of Inventory 323640 425880 329680 1079200 Sales Commissions @ 4% 35048 53248 27248 115544 Advertising 320000 320000 320000 960000 Rent 30000 30000 30000 90000 Salaries 130000 130000 130000 390000 Utilities 13000 13000 13000 39000 Dividend Paid 24000 0 0 24000 Equipment purchased 0 22000 52000 74000 Total cash Disbursements $875,688 $994,128 $901,928 $2,771,744 Excess /(deficiency) of cash receipts over cash disbursements ($94,128) $16,164 $315,936 $112,936 Financing Borrowed 157000 46000 $203,000 Repaid -203000 ($203,000) Interest Repaid -5630 ($5,630) Total financing 157000 46000 -208630 -5630 Cash Balance $872 $164 $45,306 $203,000 Ending Cash balance $62,872 $62,164 $107,306 $107,306 Dear student the month wise income staement is for your understanding Income Statement as on 3o June 2016 April May June Total Sales 876200 1331200 681200 2888600 ## Less: variable Cost Cost of Good Sold 350480 532480 272480 1155440 Sales Commissions @ 4% 35048 53248 27248 115544 Contribution 490672 745472 381472 1617616 Fixed Expenses Advertising 320000 320000 320000 960000 Salaries 30000 30000 30000 90000 Utilities 130000 130000 130000 390000 Rent 13000 13000 13000 39000 Insurance 4200 4200 4200 12600 Depreciation 26000 26000 26000 78000 total fixed expenses 523200 523200 523200 1569600 Operating Income -32528 222272 -141728 48016 Interest On Short Term Loan 1570 2030 2030 5630 Net Income -34098 220242 -143758 42386 ans 3 Income statement For the three months period Sales 2888600 Less: variable Cost Cost of Good Sold 1155440 Sales Commissions @ 4% 115544 Total variable expenses 1270984 Contribution 1617616 Fixed Expenses Advertising 960000 Salaries 90000 Utilities 390000 Rent 39000 Insurance 12600 Depreciation 78000 total fixed expenses 1569600 Operating Income 48016 Interest On Short Term Loan -5630 Net Income 42386 Net Income Statement of Retained earnings Opening balance 735352 Add: Net Income for the year 42386 Less: Dividend payable -24000 Balance June 30 753738 BalANCE Sheet as on 30 June Assets Cash 107306 Accounts Receivable 678080 Inventory 67392 Prepaid Insurance=(27000-(4200*3)) 14400 Property & Equipment (1070000+74000) 1144000 Less: Accumulated Depreciation -78000 1933178 Liabilities & Stockholder equity Accounts payable 115440 Dividend Payable 24000 Total Laibilities 139440 Stockholder Equity Common Stock 1040000 Retained earnings 753738 Total Stockholder Equity 1793738 TotalLiabilities & Stockholder Equity 1933178

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