You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2481117 • 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.
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.)
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.
a. A sales budget, by month and in total. Sales Budget April May June Quarter Budgeted unit sales Selling price per unit Total sales b. A schedule of expected cash collections from sales, by month and in total. Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February sales March sales April sales May sales June sales Total cash collections 0 0 0 $ O $ O $ 0 S 0Explanation / Answer
Ans 1 Sales Budget working April May June Total February March July Sales in units A 66800 101800 51800.0 220400 27800 41800 31800 Sale Price 15 15 15 15 15 15 15 Sales in value 1002000 1527000 777000 3306000 417000 627000 477000 Schedue of Expected cash Flows February Sales 41700 41700 March Sales 438900 62700 501600 April sales 200400 701400 100200 1002000 May Sales 305400 1068900 1374300 JuNe Sales 155400 155400 Total A 681000 1069500 1324500 3075000 Puchase Budget April May June Total July Finished Goods Sales 66800 101800 51800 220400 31800 Closing Inventory 40% of next month sales S*.4 40720 20720 12720 12720 Note Beginning Inventory of April is =130928/4.9=26720 Total Finised Goods 107520 122520 64520 233120 Less: Beginning Inventory 26720 40720 20720 26720 Units to be produced 80800 81800 43800 206400 Purchase Price 4.9 4.9 4.9 4.9 Total Purchase price A 395920 400820 214620 1011360 Budgeted Cash Disbursement for Mercandise Purchases April May June Total Accounts Payable 395920 400820 214620 1011360 March Purchases 109000 April Purchases 197960 197960 0 395920 May Purchases 200410 200410 400820 June Purchases 107310 107310 Total B 306960 398370 307720 904050 Cash Budget April May J June Qtr Beginning Cash balance 83000 $59,510 $77,220 83000 Ans 1 Sales Budget 681000 1069500 1324500 3075000 Total cash available 764000 1129010 1401720 3158000 Less: Total cash payment Cash payment of purchases 306960 398370 307720 904050 Sales Commissions @ 4% 40080 61080 31080 132240 Advertising & Promotion 290000 290000 290000 870000 Salaries 124000 124000 124000 372000 Utilities 11500 11500 11500 34500 Rent 27000 27000 27000 81000 Divedend Paid 21950 21950 Eqyuipment purchased 20500 49000 69500 Total Cash Disbusements 821490 932450 840300 $2,594,240 Excess of cash available over disbursement ($57,490) $196,560 $561,420 $563,760 Minimum Cash balance (working) 59000 59000 59000 59000 Cash balnce Available (working) ($116,490) $137,560 $502,420 $504,760 Borrowed 117000 $117,000 Repaid -117000 ($117,000) Interest Repaid 3% on $46000 -2340 ($2,340) Cash Balance $510 $18,220 $502,420 $502,420 Closing Cash Balance (Minimum Balance+cash balance) $59,510 $77,220 $561,420 $561,420
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