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-$14 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) February (actual) March (actual) April (budget) May (budget) 21,600 June (budget) 27,600 July (budget) 41,600 August (budget) 66,600 September (budget) 51,600 31,600 29,600 101,600 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 $4.80 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:

Explanation / Answer

Ans 1 a. Sales budget is as under:-

Ans 1 b . Schedule of expected cash collections is as under

Firstly we have to calculate the sale amount of month Feb. and march

Feb. sale = 27,600*14 = $386400

March Sale = 41,600*14 = $582400

Amounts in $

Particulars

Ans 1 c. Purchase budget for month and in total are as under:-

Closing units for March month = 40% of April Sale= 40% of 66,600= 26640 units = opening of April

Closing units for june = 40% of July sale = 40% of 31600 = 12,640 units

Ans d. Cash disbursement for month and in total are as under

Payments of 50% March purchase to be paid in april

March Purchase = Sales + Closing - Opening

March Purchase = 582400 + 26640*4.8 - 386400*40% = $555712

50% of march purchase = $555712*50% = $277856

Amounts are in $

56896

Particulars April May June Total Sales in units A 66,600 101,600 51,600 219,800 Sale price per pair B $14 $14 $14 Sales in $ (A*B) $932400 $1422400 $722400 $30,77,200

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