You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2461144 • 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.
Required:
1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
a. A sales budget, by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.(Round unit cost of purchases to 1 decimal place.)
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. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
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
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 a Sales Budget April May June Total Sales in Units 67,400 102,400 52,400 222,200 Sp Per Unit 16 16 16 16 Total Sales in $ 1,078,400 1,638,400 838,400 3,555,200 Answer b Schedule of Expected Cash Collections from Sales April May June Total Collection from Accounts Receivables Feb Sales 45,440 45,440 March Sales 474,880 67,840 542,720 April Sales 215,680 754,880 107,840 1,078,400 May Sales 327,680 1,146,880 1,474,560 June Sales Sales - - 167,680 167,680 Total cash Collections 736,000 1,150,400 1,422,400 3,308,800 Answer c Merchandise Purchase Budget April May June Total Sales In units 67,400 102,400 52,400 222,200 Add: Closing Inventory in units 40,960 20,960 12,960 74,880 Total Needs 108,360 123,360 65,360 297,080 Less: opening Inventory in uints (26,960) (40,960) (20,960) (88,880) Required Purchases in Units 81,400 82,400 44,400 208,200 Price per paid of Earings 5.20 5.20 5.20 5.20 Total Purchases in $ 423,280 428,480 230,880 1,082,640 Answer d Schedule of Cash payments to Suppliers April May June Total Cash Payment Accounts Payable - March 112000 112000 April Purchases 211640 211640 423280 May Purchases 214240 214240 428480 June Purchases 115,440 115440 Total Cash Payment to Suppliers 323,640 425,880 329,680 1,079,200 Answer e Selling & Admn. Budget October Nov. Dec Total Sales Comm. - 4% 43,136 65,536 33,536 142,208 Fixed Advt. 320,000 320,000 320,000 960,000 Rent (Fixed) 30,000 30,000 30,000 90,000 Salary Expense 130,000 130,000 130,000 390,000 Utilities 13,000 13,000 13,000 39,000 Insurance 4,200 4,200 4,200 12,600 Dep. 26,000 26,000 26,000 78,000 Total 566,336 588,736 556,736 1,711,808 Schedule of Cash payments of Selling & Admn. Budget October Nov. Dec Total Sales Comm. - 4% 43,136 65,536 33,536 142,208 Fixed Advt. 320,000 320,000 320,000 960,000 Rent (Fixed) 30,000 30,000 30,000 90,000 Salary Expense 130,000 130,000 130,000 390,000 Utilities 13,000 13,000 13,000 39,000 Total 536,136 558,536 526,536 1,621,208 Cash budget October Nov. Dec Total Opening cash Balance 86,000 62,224 80,968 86,000 Add: receipts Collection from Customers 736,000 1,150,400 1,422,400 3,308,800 Total Cash available 822,000 1,212,624 1,503,368 3,394,800 Less: Disbursements Cash Disbursement - Accounts Payable 323,640 425,880 329,680 1,079,200 Selling & Admn. Exp. 536,136 558,536 526,536 1,621,208 Purchase of Equipment - 22,000 52,000 74,000 Dividend Paid 24,000 - - 24,000 Total Disbursement 883,776 1,006,416 908,216 2,798,408 Cash Balance Closing (61,776) 206,208 595,152 596,392 Add: Finance from Bank 124,000 124,000 Less: Payment to Bank - (124,000) - (124,000) Less: Payment of interet - Bank loan - (1,240) - (1,240) Net Cash Balance Closing 62,224 80,968 595,152 595,152 Income Statement For the Qtr Ending June 30 Sales 3,555,200 Less: Variable Cost Cost of Goods Sold (222,200 X 5.20) 1,155,440 Sales Comm. - 4 % of Sales 142208 1,297,648 Contribution 2,257,552 Less: Fixed Cost Advt. 960,000 Rent (Fixed) 90,000 Salary Expense 390,000 Utilities 39,000 Insurance 12,600 Dep. 78,000 1,569,600 Operating Profit 687,952 Less: Interest Expenses 1,240 Net Income 686,712 Balance Sheet As on June 30 Assets Current Assets Cash 595,152 Accounts receivables 834,560 Prepaid Insurance 14,400 Inventory 67,392 1,511,504 Fixed Assets Property & Equipment 1,144,000 Less: Dep. (78,000) 1,066,000 Total Assets 2,577,504 Liabilities Accounts Payable 115,440 Dividends Payable 24,000 Total liabilities 139,440 Shareholders's Equity Common Stock 1,040,000 Retained Earnings 1,398,064 Total Stockholders equity 2,438,064 Total liabilities & Stockholders' Equity 2,577,504 Schedule of Retained Earnings As on June 30 Opening Balance 735,352 Add: net income 686,712 Less: Dividend declared (24,000) Closing Balance 1,398,064
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