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 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-$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) February (actual) March (actual) April (budget) May (budget) 20,000 June (budget) 26,000 July (budget) 40,000 August (budget) 65,000 September (budget) 100,000 50,000 30,000 28,000 25,000 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, 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 Salaries Utilities Insurance Depreciation $ 200,000 $18,000 $106,000 $7,000 $ 3,000 $14,000

Explanation / Answer

(a) Sales Budget April May June Total Budgeted Sales - units 65000 100000 50000 215000 Selling Price per unit 10 10 10 10 Budgeted Sales 650000 1000000 500000 2150000 (b)   Schedule of cash receipts April May June Total Credit Sales    February sales 26000 26000    March Sales 280000 40000 320000    April Sales 130000 455000 65000 650000    May Sales 200000 700000 900000    June Sales 100000 100000    Total Collections 436000 695000 865000 1996000 Receivables 560000 865000 500000 500000 (c) Inventory Purchase Budget April May June Total Budgeted sales units 65000 100000 50000 215000 Add: Desired ending inventory 40000 20000 12000 12000        (40% of next month's cost) Total goods neded 105000 120000 62000 227000 Less: Beginning inventory 26000 40000 20000 26000 Budgeted purchase units 79000 80000 42000 201000 Cost per unit of inventory 4 4 4 4 Total cost of purchases 316000 320000 168000 804000 (d) Cash payment budget for purchases April May June Total Budgeted Purchases 316000 320000 168000 804000 Payments:     March purchases 100000 100000     April purchases 158000 158000 316000     May purchases 160000 160000 320000     June purchases 84000 84000     Total payments 258000 318000 244000 820000 Accounts Payable 158000 160000 84000 84000 (e) Operating expenses budget April May June Total Sales commission(4% of sales) 26000 40000 20000 86000 Advertising expense 200000 200000 200000 600000 Rent expense 18000 18000 18000 54000 Salaries expense 106000 106000 106000 318000 Utilities expense 7000 7000 7000 21000 Insurance expense 3000 3000 3000 9000 Depreciation expense 14000 14000 14000 42000 Total operating expense 374000 388000 368000 1130000 Scedhule of cash payments for operating expenses April May June Total Sales commission(4% of sales) 26000 40000 20000 86000 Advertising expense 200000 200000 200000 600000 Rent expense 18000 18000 18000 54000 Salaries expense 106000 106000 106000 318000 Utilities expense 7000 7000 7000 21000 Cash payment for operating expense 357000 371000 351000 1079000 EARRINGS LIMITED Cash Budget April May June Total Beginning Balance 74000 50000 50000 74000 Add: Cash receipts 436000 695000 865000 1996000 Cash available for disbursements 510000 745000 915000 2070000 Less: Payments        for purchase of inventory 258000 318000 244000 820000        For operating expenses 357000 371000 351000 1079000        for purchase of equipment 16000 40000 56000        For dividend 15000 15000        for interest 1850 1850       Total payments 630000 705000 636850 1971850 Receipts minus payments -120000 40000 278150 98150 Minimum cash balance 50000 50000 50000 50000 Excess / (Shortage) -170000 -10000 228150 48150 Financing activitiy Borrowing / (Repayments) 170000 10000 180000 Repayments -180000 -180000 Total Financing 170000 10000 -180000 0 Ending cash balance 50000 50000 98150 98150 EARRINGS LIMITED Contribution margin income statement For the quarter ending June 30 Sales Revenue 2150000 Variable expenses:      Cost of goods sold 860000      Sales commission 86000 Total variable expenses 946000 Contribution margin 1204000 Fixed expenses:     Advertising expense 600000    Rent expense 54000    Salaries expense 318000    Utilities expense 21000    Insurance expense 9000    Depreciation expense 42000    total operating expenses 1044000 Net operating income 160000 Interest expense 1850 Net income 158150 EARRINGS LIMITED Budgeted Balance sheet as at June 30 Assets Cash 98150 Accounts Receivable 500000 Inventory 48000 Prepaid insurance 12000 Property and equipment , net Beginning balance, net 950000 Add: Purchases 56000 1006000 Less: Depreciation 42000 964000 Total Assets 1622150 Liabilities and owners' equity Accounts Payable 84000 Dividend Payable 15000 Total liabilities 99000 Capital stock 800000 Retained earnings Balance as at April 1 580000 Net income 158150 738150 Dividends 15000 723150 Total Liabilities and equity 1622150 0

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