You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2545416 • 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 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—$10 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) 20,000 June (budget) 50,000 February (actual) 26,000 July (budget) 30,000 March (actual) 40,000 August (budget) 28,000 April (budget) 65,000 September (budget) 25,000 May (budget) 100,000 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 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: Variable: Sales commissions 4 % of sales Fixed: Advertising $ 200,000 Rent $ 18,000 Salaries $ 106,000 Utilities $ 7,000 Insurance $ 3,000 Depreciation $ 14,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet as of March 31 is given below: Assets Cash $ 74,000 Accounts receivable ($26,000 February sales; $320,000 March sales) 346,000 Inventory 104,000 Prepaid insurance 21,000 Property and equipment (net) 950,000 Total assets $ 1,495,000 Liabilities and Stockholders’ Equity Accounts payable $ 100,000 Dividends payable 15,000 Common stock 800,000 Retained earnings 580,000 Total liabilities and stockholders’ equity $ 1,495,000 The company maintains a minimum cash balance of $50,000. 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 $50,000 in cash. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules: 1. a. A sales budget, by month and in total. b. A schedule of expected cash collections, by month and in total. c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. 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. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000. 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.
Explanation / Answer
Answer a Sales Budget April May June Total Sales in Units 65,000 100,000 50,000 215,000 Sp Per Unit 10 10 10 10 Total Sales in $ 650,000 1,000,000 500,000 2,150,000 Answer b Schedule of Expected Cash Collections from Sales April May June Total Collection from Accounts Receivables Feb Sales 26,000 26,000 March Sales 280,000 40,000 - 320,000 April Sales 130,000 455,000 65,000 650,000 May Sales 200,000 700,000 900,000 June Sales Sales 100,000 100,000 Total cash Collections 436,000 695,000 865,000 1,996,000 Answer c Merchandise Purchase Budget April May June Total Sales In units 65,000 100,000 50,000 215,000 Add: Closing Inventory in units 40,000 20,000 12,000 12,000 Total Needs 105,000 120,000 62,000 227,000 Less: opening Inventory in uints (26,000) (40,000) (20,000) 26,000 Required Purchases in Units 79,000 80,000 42,000 253,000 Price per paid of Earings 4.00 4.00 4.00 4.00 Total Purchases in $ 316,000 320,000 168,000 804,000 Answer d Schedule of Cash payments to Suppliers April May June Total Cash Payment Accounts Payable - March 100,000 100,000 April Purchases 158,000 158,000 316,000 May Purchases 160,000 160,000 320,000 June Purchases 84,000 84,000 Total Cash Payment to Suppliers 258,000 318,000 244,000 820,000 Answer e Selling & Admn. Budget April May June Total Sales Comm. - 4% 26,000 40,000 20,000 86,000 Fixed Advt. 200,000 200,000 200,000 600,000 Rent (Fixed) 18,000 18,000 18,000 54,000 Salary Expense 106,000 106,000 106,000 318,000 Utilities 7,000 7,000 7,000 21,000 Insurance 3,000 3,000 3,000 9,000 Dep. 14,000 14,000 14,000 42,000 Total 374,000 388,000 368,000 1,130,000 Schedule of Cash payments of Selling & Admn. Budget April May June Total Sales Comm. - 4% 26,000 40,000 20,000 86,000 Fixed Advt. 200,000 200,000 200,000 600,000 Rent (Fixed) 18,000 18,000 18,000 54,000 Salary Expense 106,000 106,000 106,000 318,000 Utilities 7,000 7,000 7,000 21,000 Total 357,000 371,000 351,000 1,079,000 Cash budget April May June Total Opening cash Balance 74,000 50,000 50,000 74,000 Add: receipts Collection from Customers 436,000 695,000 865,000 1,996,000 Total Cash available 510,000 745,000 915,000 2,070,000 Less: Disbursements Cash Disbursement - Accounts Payable 258,000 318,000 244,000 820,000 Selling & Admn. Exp. 357,000 371,000 351,000 1,079,000 Purchase of Equipment - 16,000 40,000 56,000 Dividend Paid 15,000 - - 15,000 Total Disbursement 630,000 705,000 635,000 1,970,000 Cash Balance Closing (120,000) 40,000 280,000 100,000 Add: Finance from Bank 170,000 10,000 180,000 Less: Payment to Bank - (180,000) (180,000) Less: Payment of interet - Bank loan - (5,400) (5,400) Net Cash Balance Closing 50,000 50,000 94,600 94,600 Income Statement For the Qtr Ending June 30 Sales 2,150,000 Less: Variable Cost Cost of Goods Sold 860,000 Sales Comm. - 4 % of Sales 86,000 946,000 Contribution 1,204,000 Less: Fixed Cost Advt. 600,000 Rent (Fixed) 54,000 Salary Expense 318,000 Utilities 21,000 Insurance 9,000 Dep. 42,000 1,044,000 Operating Profit 160,000 Less: Interest Expenses 5,400 Net Income 154,600 Balance Sheet As on June 30 Assets Current Assets Cash 94,600 Accounts receivables 500,000 Prepaid Insurance 12,000 Inventory 48,000 654,600 Fixed Assets Property & Equipment 1,006,000 Less: Dep. (42,000) 964,000 Total Assets 1,618,600 Liabilities Accounts Payable 84,000 Dividends Payable 15,000 Total liabilities 99,000 Shareholders's Equity Common Stock 800,000 Retained Earnings 719,600 Total Stockholders equity 1,519,600 Total liabilities & Stockholders' Equity 1,618,600 - Schedule of Retained Earnings As on June 30 Opening Balance 580,000 Add: net income 154,600 Less: Dividend declared (15,000) Closing Balance 719,600
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