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

ID: 2471705 • 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 $5 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 maintains a minimum cash balance of $60,000. 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 $60,000 in cash.

A schedule of expected cash collections from sales, by month and in total. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

A schedule of expected cash disbursements for merchandise purchases, by month and in total. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

A cash budget. Show the budget by month and in total. (Leave no cells blank - be certain to enter "0" wherever required. Deficiencies, repayments and interest should be preceded by a minus sign when appropriate. Total financing should be preceded by a minus sign when it consist of repayments and interest. Omit the "$" sign in your response.)

May

Explanation / Answer

(a) Sales Budget Earrnigs Unlimited For the Period of Apri to June April May June Quarter Budgeted sales In Units 65600 100600 50600 216800 Selling Price Per unit 11 11 11 11 Total Sales 721600 1106600 556600 2384800 (b) Schedule of Expected Cash Colllections Earrnings Unlimited For the Period of April to June April May June Quarter February Sales 29260 29260 March Sales 312620 44660 357280 April Sales 144320 505120 72160 721600 May Sales 221320 774620 995940 June Sales 111320 111320 Total Cash Collections 486200 771100 958100 2215400 (C ) Merchandise Purchase Budget Earrnings Unlimited For the Period of April to June April May June Quarter Budgeted Sales 65600 100600 50600 216800 Closing Inventory required 40240 20240 12240 12240 Less: Opening Inventory 26200 40240 20240 26200 Required Unit Purchases 79640 80600 42600 202840 Required Dollar Purchases 398200 403000 213000 1014200 (d) Schedule of Expected Cash Disbursements Earrnings Unlimited For the Period of April to June April May June Quarter Accounts Payable 126500 126500 April Purchases 199100 199100 398200 May Purchases 201500 201500 403000 June Purchases 106500 106500 Total Cash Payments 325600 400600 308000 1034200 Req-2 Cash Budget Earrnings Unlimited For the Three Months ending June 30 April May June Quarter Opening Cash Balance 130200 60336 60372 130200 Cash Collections 486200 771100 958100 2215400 Total Cash available 616400 831436 1018472 2345600 Less: Disbursements Merchandise Purchase 325600 400600 308000 1034200 Sales Commisison 28864 44264 22264 95392 Advertising 199400 199400 199400 598200 Rent 17400 17400 17400 52200 Salaries 105400 105400 105400 316200 Utilities 6400 6400 6400 19200 Equipment purchase 15600 39400 55000 Dividend Payable 12000 12000 Total Disbursements 695064 789064 698264 2182392 Excess(Deficiency) of receipts over disbursements -78664 42372 320208 163208 Financing Borrowing 139000 18000 157000 Interest -4530 -4530 Repayment -157000 -157000 Total Financing 139000 157000 0 157000 Ending Cash Balance 60336 60372 158678 158678 Req-3 Income Statement Earrnings Unlimited For the Three Months ending June 30 Amount Sales 2384800 Less: Cost of Goods Sold 1084000 Sales Commission 95392 Contribution margin 1205408 Fixed Expenses Advertising 598200 Rent 52200 Salaries 316200 Utilities 19200 Insurance 7200 Depreciation 40200 Net Operating income 172208 Interest 4530 Dividends 12000 Net Income 155678 Budgeted Balance Sheet Earrnings Unlimited Jun-30 Assets $ Liabilities $ Cash 158878 Accounts Payable 106500 Accounts Receivable 555940 Dividends Payable 12000 Inventory 61200 Capital Stock 860000 Prepaid Insurance 14400 Retained Earnings 741678 property and Equipment 929760 Total Assets 1720178 1720178

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

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