You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2536226 • 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—$18 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)
22,800
June (budget)
52,800
February (actual)
28,800
July (budget)
32,800
March (actual)
42,800
August (budget)
30,800
April (budget)
67,800
September (budget)
27,800
May (budget)
102,800
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 $5.4 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
$
340,000
Rent
$
32,000
Salaries
$
134,000
Utilities
$
14,000
Insurance
$
4,400
Depreciation
$
28,000
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $23,000 in new equipment during May and $54,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $25,500 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
$
88,000
Accounts receivable ($51,840 February sales;$616,320 March sales)
668,160
Inventory
146,448
Prepaid insurance
28,000
Property and equipment (net)
1,090,000
Total assets
$
2,020,608
Liabilities and Stockholders’ Equity
Accounts payable
$
114,000
Dividends payable
25,500
Common stock
1,080,000
Retained earnings
801,108
Total liabilities and stockholders’ equity
$
2,020,608
The company maintains a minimum cash balance of $64,000. 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 $64,000 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.
Sales Budget
April
May
June
Quarter
Budgeted unit sales
67,800
102,800
52,800
223,400
Selling price per unit
$18
$18
$18
$18
Total sales
$1,220,400
$1,850,400
$950,400
$4,021,200
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
$51,840
0
0
$51,840
March sales
539,280
77,040
0
616,320
April sales
244,080
854,280
122,040
1,220,400
May sales
0
370,080
1,295,280
1,665,360
June sales
0
0
190,080
190,080
Total cash collections
$835,200
$1,301,400
$1,607,400
$3,744,000
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.)
Earrings Unlimited
Merchandise Purchases Budget
April
May
June
Quater
Budgeted unit sales
67,800
102,800
52,800
223,400
Add: Desired ending merchandise inventory
41,120
21,120
13,120
13,120
Total needs
108,920
123,920
65,920
236,520
Less: Beginning merchandise inventory
27,120
41,120
21,120
27,120
Required purchases
81,800
82,800
44,800
209,400
Unit cost
$5.4
$5.4
$5.4
$5.4
Required dollar purchases
$441,720
$447,120
$241,920
$1,130,760
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
Earrings Unlimited
Budgeted Cash Disbursements for Merchandise Purchases
April
May
June
Quarter
Accounts payable
$114,000
$0
$0
$114,000
April purchases
220,860
220,860
0
441,720
May purchases
0
223,560
223,560
447,120
June purchases
0
0
120,960
120,960
Total cash payments
$334,860
$444,420
$344,520
1,123,800
2. A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
Earrings Unlimited
Cash Budget
For the Three Months Ending June 30
April
May
June
Quarter
Beginning cash balance
$88,000
$64,024
$303,988
$88,000
Add collections from customers
835,200
1,301,400
1,607,400
3,744,000
Total cash available
923,200
1,365,424
1,911,388
3,832,000
Less cash disbursements:
Merchandise purchases
334,860
444,420
344,520
1,123,800
Advertising
340,000
340,000
340,000
1,020,000
Rent
32,000
32,000
32,000
96,000
Salaries
134,000
134,000
134,000
402,000
Commissions
48,816
74,016
38,016
160,848
Utilities
14,000
14,000
14,000
42,000
Equipment purchases
0
23,000
54,000
77,000
Dividends paid
25,500
0
0
25,500
Total cash disbursements
929,176
1,061,436
956,536
2,947,148
Excess (deficiency) of cash available over disbursements
(5,976)
303,988
954,852
884,852
Financing:
Borrowings
70,000
0
0
70,000
Repayments
0
0
(70,000)
(70,000)
Interest
0
0
(2,100)
(2,100)
Total financing
70,000
0
(72,100)
(2,100)
Ending cash balance
$64,024
$303,988
$882,752
$882,752
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
Earrings Unlimited
Budgeted Income Statement
For the Three Months Ended June 30
Variable expenses:
0
0
Fixed expenses:
0
0
0
4. A budgeted balance sheet as of June 30.
Earrings Unlimited
Budgeted Balance Sheet
June 30
Assets
Total assets
$0
Liabilities and Stockholders’ Equity
Total liabilities and stockholders’ equity
$0
January (actual)
22,800
June (budget)
52,800
February (actual)
28,800
July (budget)
32,800
March (actual)
42,800
August (budget)
30,800
April (budget)
67,800
September (budget)
27,800
May (budget)
102,800
Explanation / Answer
On the basis of the solution provided in the question for part 1 & part 2. Further solution is given below for part 3 & part 4
Earrings Unlimited Budgeted Income Statement For the Three months June 30 Particulars Units Cost Per Unit/monthly Amount Sales in Units 223,400 Sales in Units $ 18 $ 4,021,200 Less: Variable Expenses Cost of Goods Sold $ 5 $ 1,206,360 Commission 4% of Sales $ 160,848 Contribution Margin $ 2,653,992 Less: Fixed Expenses (Monthly) Advertising $ 340,000 $ 1,020,000 Rent $ 32,000 $ 96,000 Salaries $ 134,000 $ 402,000 Utilities $ 14,000 $ 42,000 Insurance $ 4,400 $ 13,200 Depreciation $ 28,000 $ 84,000 Net Operating Income $ 996,792 Less: Interest Expense $ 2,100 Net Income $ 994,692Related Questions
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