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 a master budget for the upcoming second quarter. 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):

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 $4.90 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. 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:

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.

The company’s balance sheet as of March 31 is given below:

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.

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.

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 Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 Variable expenses 0 Fixed expenses: 0 0 0

Explanation / Answer

ans 3 Income statement For the three months period Sales 3306000 Less: variable Cost Cost of Good Sold 1079960 Sales Commissions @ 4% 132240 Total variable expenses 1212200 Contribution 2093800 Fixed Expenses Advertising 870000 Salaries 81000 Utilities 372000 Rent 34500 Insurance 11700 Depreciation 69000 total fixed expenses 1438200 Operating Income 655600 Interest On Short Term Loan -3240 Net Income 652360 Net Income Statement of Retained earnings Opening balance 711978 Add: Net Income for the year 652360 Less: Dividend payable -21750 Balance June 30 1342588 BalANCE Sheet as on 30 June Assets Cash 560720 Accounts Receivable 774300 Inventory 62328 Prepaid Insurance=(25500-11700) 13800 Property & Equipment 1109500 Less: Accumulated Depreciation -69000 2451648 Liabilities & Stockholder equity Accounts payable 107310 Dividend Payable 21750 Total Laibilities 129060 Stockholder Equity Common Stock 980000 Retained earnings 1342588 Total Stockholder Equity 2322588 TotalLiabilities & Stockholder Equity 2451648 Schedule of Cash collection April May June Total February March July August Sales in units A 66800 101800 51800 220400 27800 41800 31800 29800 Sale Price 15 15 15 15 15 15 15 15 Sales in value 1002000 1527000 777000 3306000 417000 627000 477000 447000 Feb sales 41700 41700 Marc sales (70%,10% of $400000) 438900 62700 501600 April sales (20%,70%,10%) 200400 701400 100200 1002000 May Sales 305400 1068900 1374300 June sales 155400 155400 Total A 681000 1069500 1324500 3075000 Accounts Receivable May 1527000*.1+June 777000*.8= 774300 Note 2 Purcahse Budget April May June Total July Units to be sold 66800 101800 51800 220400 31800 Closing Inventory 40% of next month sales S*.4 40720 20720 12720 12720 Total Finised Googd 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 COGS= Units sold*4 327320 498820 253820 1079960 Cash Disbursement Schedule From march purchases 109000 109000 From April Purchases 197960 197960 395920 From May Purchases 200410 200410 400820 From June purchases 107310 107310 Total B 306960 398370 307720 1013050 Accounts payable as on 30 June 107310 working Cash payments payment of Inventory 306960 398370 307720 1013050 Sales Commissions @ 4% 40080 61080 31080 132240 Advertising 290000 290000 290000 870000 Rent 27000 27000 27000 81000 Salaries 124000 124000 124000 372000 Utilities 11500 11500 11500 34500 Dividend Paid 21750 21750 Equipment purchased 20500 49000 69500 April May J June Total Beginning Cash balance 83000 $50,710 $187,760 83000 Cash receipt 681000 1069500 1324500 3075000 Total cash available 764000 1120210 1512260 3158000 Less: Cash Disbursements payment of Inventory 306960 398370 307720 1013050 Sales Commissions @ 4% 40080 61080 31080 132240 Advertising 290000 290000 290000 870000 Rent 27000 27000 27000 81000 Salaries 124000 124000 124000 372000 Utilities 11500 11500 11500 34500 Dividend Paid 21750 0 0 21750 Equipment purchased 0 20500 49000 69500 Total cash Disbursements $821,290 $932,450 $840,300 $2,594,040 Excess /(deficiency) of cash receipts over cash disbursements ($57,290) $187,760 $671,960 $563,960 Minimum Cash balance (working) 59000 59000 59000 59000 Financing Borrowed 108000 $108,000 Repaid -108000 ($108,000) Interest Repaid -3240 ($3,240) Total financing 108000 0 -111240 -3240 Ending Cash balance $50,710 $187,760 $560,720 $560,720 Dear student the month wise income staement is for your understanding Income Statement as on 3o June 2016 April May June Total Sales 1002000 1527000 777000 3306000 3306000 Less: variable Cost Cost of Good Sold 327320 498820 253820 1079960 Sales Commissions @ 4% 40080 61080 31080 132240 Contribution 634600 967100 492100 2093800 Fixed Expenses Advertising 290000 290000 290000 870000 Salaries 27000 27000 27000 81000 Utilities 124000 124000 124000 372000 Rent 11500 11500 11500 34500 Insurance 3900 3900 3900 11700 Depreciation 23000 23000 23000 69000 total fixed expenses 479400 479400 479400 1438200 Operating Income 155200 487700 12700 655600 Interest On Short Term Loan 1080 1080 1080 3240 Net Income 154120 486620 11620 652360

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