You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2421979 • 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 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—$11 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 $4.1 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, 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.
The company plans to purchase $16,500 in new equipment during May and $41,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,750 each quarter, payable in the first month of the following quarter.
The company maintains a minimum cash balance of $51,000. 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 $51,000 in cash.
Question
A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
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 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.
Explanation / Answer
Particulars April May June Opening balance 75000 51592 51434 Revenues Income from Sales 13040 20040 10040 28140 45640 70140 2620 4020 6520 Total Sales 43800 69700 86700 Per unit Cost 11 11 11 Total Sales 481800 766700 953700 Amount Borrowed 149000 114000 630800 880700 953700 Payment Purchase Cost 39600 40100 21100 25100 39600 40100 Total Purchase 64700 79700 61200 Per unit Cost 4.1 4.1 4.1 Total Purchase 265270 326770 250920 Sales Commision Paid 28688 44088 22088 Advertising 210000 210000 210000 Rent 19000 19000 19000 Salaries 108000 108000 108000 Utilities 7500 7500 7500 Payment of Intt. On amount borrowed 2630 Purchase of equipment 16500 41000 Dividend Paid 15750 Amount Paid 149000 114000 Total Payments 654208 880858 775138 Net Cash balance 51592 51434 229996 Minimum cash balance 51000 51000 51000 Working Notes :- Sales 65200 100200 50200 Add Closing Stock 40080 20080 12080 Less Opening Stock 26080 40080 20080 Purchases 79200 80200 42200 Interest 1490 1140 Total 2630 Profit & Loss Statement Particulars April May June Sales 717200 1102200 552200 Less Purchase 324720 328820 173020 Gross Profit 392480 773380 379180 Less Sales Commision Paid 28688 44088 22088 Advertising 210000 210000 210000 Rent 19000 19000 19000 Salaries 108000 108000 108000 Utilities 7500 7500 7500 Insurance 3100 3100 3100 Depreciation 15000 15000 15000 Payment of Intt. On amount borrowed 2630 Net Profit/Loss 1192 366692 -8138
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