You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2479767 • 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—$15 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):
January (actual)
21,800
June (budget)
51,800
February (actual)
27,800
July (budget)
31,800
March (actual)
41,800
August (budget)
29,800
April (budget)
66,800
September (budget)
26,800
May (budget)
101,800
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 $4.9 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.
Monthly operating expenses for the company are given below:
Variable:
Sales commissions
4%
of sales
Fixed:
Advertising
$
290,000
Rent
$
27,000
Salaries
$
124,000
Utilities
$
11,500
Insurance
$
3,900
Depreciation
$
23,000
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $20,500 in new equipment during May and $49,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,750 each quarter, payable in the first month of the following quarter.
A listing of the company’s ledger accounts as of March 31 is given below:
Assets
Cash
$
83,000
Accounts receivable ($41,700 February sales; $501,600 March sales)
543,300
Inventory
130,928
Prepaid insurance
25,500
Property and equipment (net)
1,040,000
Total assets
$
1,822,728
Liabilities and Stockholders’ Equity
Accounts payable
$
109,000
Dividends payable
21,750
Common stock
980,000
Retained earnings
711,978
Total liabilities and stockholders’ equity
$
1,822,728
The company maintains a minimum cash balance of $59,000. 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 $59,000 in cash.
.
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
Sales April May June units 66,800 101,800 51,800 Price 15 15 15 total sales 1002000 1527000 777000 3306000 Cash collection April May June total Feb(417,000) 41,700 41,700 March(627,000) 438900 62700 501600 april(1002,000) 200400 701400 100200 1002000 May(1527,000) 305400 1068900 1374300 june(777,000) 155400 155400 total collection 681,000 1069500 1324500 3,075,000 Purchase budget April May June total sale units 66,800 101,800 51,800 220,400 Add:Closing inven 40720 20720 12720 12,720 total required 107,520 122,520 64,520 233,120 less:Opening inve -26720 -40720 -20720 -26,720 total purchase 80,800 81,800 43,800 206,400 cost per unit 4.9 4.9 4.9 4.9 total cost 395920 400820 214620 1011360 Cash payment April May june total Accounts payable 109,000 109,000 april(395,920) 197960 197960 395920 May(400,820) 200410 200410 400820 June(214620) 107310 107310 total payment 306,960 398370 307720 1,013,050 Cash budget April May June total Beginning cash 83,000 59,710 196,760 83,000 Cash collection 681,000 1,069,500 1,324,500 3,075,000 total cash available 764,000 1,129,210 1,521,260 3,158,000 less:disbursement Merchandise purchase 306,960 398,370 307,720 1,013,050 Advertising 290,000 290,000 290,000 870,000 Rent 27,000 27,000 27,000 81,000 Salaries 124,000 124,000 124,000 372,000 Commissions 40080 61080 31080 132240 Utilties 11,500 11,500 11,500 34,500 Equipment purchase 0 20,500 49,000 69,500 dividend paid 21,750 0 0 21,750 total disbursement 821,290 932,450 840,300 2,594,040 Exess)def) -57,290 196,760 680,960 563,960 Financing borrowings 117,000 0 0 117,000 Repayments 0 0 -117,000 -117000 interest 0 0 -3,510 -3510 total financing 117,000 0 -120,510 -3,510 ending cash bal 59,710 196,760 560,450 560,450 income statement Sales 3,306,000 less:cost of goods sold Direct materials 1,011,360 Sales commission 132,240 total variable expense -1,143,600 Contribution 2,162,400 Fixed expenses Advertising 870,000 Rent 81,000 Salaries 372,000 Utilties 34,500 insurance 11700 Depreciation 69000 interest expense 3,510 1,441,710 -1,441,710 Net income 720,690 Balance sheet cash 560,450 Account receivable 774,300 inventory 62,328 Prepaid insurance 13,800 Property and equipment 1,040,500 total assets 2,451,378 liabiltiies Accounts payable 107,310 Dividends payable 21,750 Common stock 980,000 Retained earnings 1,410,918 total 2,519,978
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