4 You have just been hired as a new management trainee by Earrings Unlimited, a
ID: 2520291 • Letter: 4
Question
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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—$17 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 $5.8 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 plans to purchase $25,000 in new equipment during May and $58,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $28,500 each quarter, payable in the first month of the following quarter.
The company maintains a minimum cash balance of $68,000. 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 $68,000 in cash.
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A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
A budgeted balance sheet as of June 30. Screen Shot 2018-04-13 at 4.84.40 Screen Shot 2018.04-13 14.54.46 PM @ @ @ Screen Shot 2018-04-13 at 5.00.23 PM A ising of the company's ledger accounts as of Manch 31 is given beic a. A sales budget, by month and in total. Shot 2018-04-3 Accounts receivable (50.320 February ales: $592 960 March sales) Propeny and equipment (net ? Screen Shot 2018-04-13 at 4.59.17 PM Total assets 2054432 1160,000 Retained eamings Total labilies and stockholdens equity $204 43 company maintains a cash balance of Prepare a master budget for he three-month period ending June 30 a. A sales budget, by month and in total 4. A budgeted balance sheet as of June 30
Explanation / Answer
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EARRINGS LIMITED
EARRINGS LIMITED Contribution margin income statement For the quarter ending June 30 Sales Revenue 3838600 Variable expenses: Cost of goods sold 1309640 Sales commission 153544 Total variable expenses 1463184 Contribution margin 2375416 Fixed expenses: Advertising expense 1140000 Rent expense 108000 Salaries expense 426000 Utilities expense 48000 Insurance expense 14400 Depreciation expense 96000 total operating expenses 1832400 Net operating income 543016 Interest expense 4540 Net income 5384764.
EARRINGS LIMITED
Budgeted Balance sheet as at June 30 Assets Cash 463016 Accounts Receivable 905080 Inventory 77952 Prepaid insurance 15600 Property and equipment , net Beginning balance, net 1130000 Add: Purchases 83000 1213000 Less: Depreciation 96000 1117000 Total Assets 2578648 Liabilities and owners' equity Accounts Payable 132240 Dividend Payable 28500 Total liabilities 160740 Capital stock 1160000 Retained earnings Balance as at April 1 747932 Net income 538476 1286408 Dividends 28500 1257908 Total Liabilities and equity 2578648Related Questions
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