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 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

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.

Explanation / Answer

EARRING UNLIMTED Sales Budget April May June Quarter Budgeted Unit Sales 65600 100600 50600 216800 Selling Price Per Unit $                11.00 $                 11.00 $                 11.00 $                 11.00 Total Sales $      721,600.00 $ 1,106,600.00 $      556,600.00 $ 2,384,800.00 Schedule of Expected Cash collection Sales April May June Quarter Febuary sales $      292,600.00 $        29,260.00 $      321,860.00 March sales $      446,600.00 $      312,620.00 $      759,220.00 April sales $      721,600.00 $      144,320.00 $      505,120.00 $        72,160.00 $ 1,443,200.00 May Sales $ 1,106,600.00 $      221,320.00 $      774,620.00 $ 2,102,540.00 June Sales $      556,600.00 $      111,320.00 $      667,920.00 Total Cash collection $ 3,124,000.00 $      486,200.00 $      726,440.00 $      958,100.00 $ 5,294,740.00 Mercendise Purchase Budget April May June Quarter Budgeted unit sales 65600 100600 50600 216800 Add: Desired ending inventory 40240 20240 12240 12240 Total needs 105840 120840 62840 229040 Less: Beginning Inventory 26240 40240 20240 26240 Required Purchases 79600 80600 42600 202800 Cost of Purchases @$5 $      398,000.00 $      403,000.00 $      213,000.00 $ 1,014,000.00 Budgeted Cash disbursement for mercendise purchase April May June Quarter Accounts Payable $      126,500.00 $      126,500.00 April Purchases $      199,000.00 $      199,000.00 $      398,000.00 May Purchases $      201,500.00 $      201,500.00 $      403,000.00 June Purchases $      106,500.00 $      106,500.00 Total Cash Payment $      325,500.00 $      400,500.00 $      308,000.00 $ 1,034,000.00 EARRING UNLIMTED CASH BUDGET FOR THE THREE MONTHS ENDING JUNE 30. April May June Quarter Cash Balance $      130,200.00 $        60,000.00 $        60,000.00 $      250,200.00 Add: Collection from customer $      486,200.00 $      726,440.00 $      958,100.00 $ 2,170,740.00 Total Cash available $      616,400.00 $      786,440.00 $ 1,018,100.00 $ 2,420,940.00 Less: Disbursement $                        -   Mercendising Purchase $      325,500.00 $      400,500.00 $      308,000.00 $ 1,034,000.00 Advertising Expenses $      199,400.00 $      199,400.00 $      199,400.00 $      598,200.00 Rent $        17,400.00 $        17,400.00 $        17,400.00 $        52,200.00 Salaries $      105,400.00 $      105,400.00 $      105,400.00 $      316,200.00 Utilities $          6,400.00 $           6,400.00 $           6,400.00 $        19,200.00 Insurance $          2,400.00 $           2,400.00 $           2,400.00 $           7,200.00 New Equipment $        15,600.00 $        39,400.00 $        55,000.00 Dividend $        12,000.00 $        12,000.00 Principal & Interest Paid $      137,566.20 $    (137,566.20) Total Disbursement $      668,500.00 $      747,100.00 $      815,966.20 $ 2,231,566.20 Excess of receipt over disbursement $      (52,100.00) $        39,340.00 $      202,133.80 $      189,373.80 Borrowings $      113,100.00 $        20,660.00 $      133,760.00 Minimum Cash Balance $        60,000.00 $        60,000.00 $      202,133.80 $      323,133.80 EARRING UNLIMTED BUDGETED INCOME STATEMENT FOR THE THREE MONTHS ENDING JUNE 30. Sales $ 2,384,800.00 Variable Expenses Cost of goods sold $ 1,014,000.00 Commission $        95,392.00 Contribution margin $ 1,275,408.00 Fixed Expenses Advertisement $      598,200.00 Rent $        52,200.00 Salaries $      316,200.00 Utility $        19,200.00 Depreciation $        37,200.00 Net Operating Income $      252,408.00 Interest Expenses $           3,806.20 Net Income $      248,601.80 EARRING UNLIMTED BALANCE SHEET JUNE 30th Cash Account Receivable Inventory Prepaid Insurance Property & Equipment

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