You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2421981 • 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—$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 $5.2 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 $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.
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.
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
Answer:
Sales budget Particulars April May June Total Budgeted sales in units 67400 102400 52400 222200 Selling price per unit 16 16 16 16 Total sales 1078400 1638400 838400 3555200 Schedule of expected cash collections: Feb Sales 45440 45440 March sales 474880 67840 542720 April sales 215680 754880 107840 1078400 May sales 327680 1146880 1474560 June sales 167680 167680 Total cash collections 736000 1150400 1422400 3308800 Merchandise Purchase budget Budgeted sales in units 67400 102400 52400 222200 Add: Budgeted ending inventory 40960 20960 12960 74880 Total needs 108360 123360 65360 297080 Less: Beg. Inventory 26960 40960 20960 88880 Req unit purchase 81400 82400 44400 208200 Unit cost 5.2 5.2 5.2 5.2 Required dollar Purchase 423280 428480 230880 1082640 Budgeted cash disbursement for merchandise purchases: March Purchase 112000 112000 April Purchase 211640 211640 423280 May purchase 214240 214240 428480 June purchase 115440 115440 Total cash disbursements 323640 425880 329680 1079200 Cash Budget For the three months ending june 30 Cash balance, beg 86000 62224 206208 354432 Add: Receipts from customers 736000 1150400 1422400 3308800 Total cash available 822000 1212624 1628608 3663232 Less: Disbursements 0 Purchase of inventory 323640 425880 329680 1079200 Sales commissions 43136 65536 33536 142208 Salaries and wages 130000 130000 130000 390000 Utilities 13000 13000 13000 39000 Advertising 320000 320000 320000 960000 Rent 30000 30000 30000 90000 Dividend paid 24000 24000 Equipment Purchase 22000 52000 74000 Total disbursements 883776 1006416 908216 2798408 Excess (Deficiency) of receipts over disbursements -61776 206208 720392 864824 Financing: 0 Borrowings 124000 0 124000 Repayments 0 0 -124000 -124000 Interest 0 0 -3720 -3720 Total financing 124000 0 -127720 -3720 Cash balance,ending 62224 206208 592672 861104 Budgeted income statement For the three months ended june 30 Sale revenue 3555200 Variable expenses: Cost of goods sold 1155440 Commissions 142208 Contribution margin 2257552 Fixed expenses: Wages and salaries 390000 Utilities 39000 Insurance expired 12600 Depreciation 78000 Rent 90000 Advertising 960000 Net operating income 687952 Less: interest expense 3720 Net income 684232 Budgeted Balance Sheet Assets Cash 592672 Accounts receivable 834560 Inventory 67392 Unexpired insurance 14400 Property and equipment (net) 1066000 Total Assets 2575024 Liabilities and equity Accounts Payable,Purchases 115440 Dividend Payable 24000 Capital stock,no par 1040000 Retained earnings 1395584 Total liabilities and equity 2575024Related Questions
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