You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2549954 • 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—$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 $5.80 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:
Insurance is paid on an annual basis, in November of each year.
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’s balance sheet as of March 31 is given below:
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.
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 $68,000.
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.
January (actual) 23,600 June (budget) 53,600 February (actual) 29,600 July (budget) 33,600 March (actual) 43,600 August (budget) 31,600 April (budget) 68,600 September (budget) 28,600 May (budget) 103,600Explanation / Answer
Earrings Unlimited 1 Monthly Sales Budgets April May June Sales in units 68600 103600 53600 Sales price 17 17 17 Sales Revenue in 1166200 1761200 911200 2 Monthly Mechandise Purchase Budgets April May June Beginning Inventory of merchandise A 27440 41440 21440 Units to be sold B 68600 103600 53600 Ending Inventory of merchandise C 41440 21440 13440 Mechandise to be purchased C+B-A 82600 83600 45600 Purchase price 5.8 5.8 5.8 Purchase Value 479080 484880 264480 3 Calculation of cash receipts from customers Monthly Sales Budgets April May June Sales Revenue in 1166200 1761200 911200 Collected in Accounts Receivable -April 1 569160 74120 Credit sales from April 233240 816340 116620 May 352240 1232840 June 182240 Total collection of receivables 802400 1242700 1531700 4 Calculation of payment to suppliers April May June Total cost of purchases 479080 484880 264480 Accounts Payable-April 1 118000 April 239540 239540 0 May 242440 242440 June 132240 Total cash paid for merchandise 357540 481980 374680 As per Chegg Policy, we are supposed answer maximum of four sub-parts of a question Thank you
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