You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2555472 • 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—$19 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) 24,000 June (budget) 54,000 February (actual) 30,000 July (budget) 34,000 March (actual) 44,000 August (budget) 32,000 April (budget) 69,000 September (budget) 29,000 May (budget) 104,000 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 $6 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 $ 400,000 Rent $ 38,000 Salaries $ 146,000 Utilities $ 17,000 Insurance $ 5,000 Depreciation $ 34,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $26,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $30,000 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 $ 94,000 Accounts receivable ($57,000 February sales; $668,800 March sales) 725,800 Inventory 165,600 Prepaid insurance 31,000 Property and equipment (net) 1,150,000 Total assets $ 2,166,400 Liabilities and Stockholders’ Equity Accounts payable $ 120,000 Dividends payable 30,000 Common stock 1,200,000 Retained earnings 816,400 Total liabilities and stockholders’ equity $ 2,166,400 The company maintains a minimum cash balance of $70,000. 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 $70,000 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. b. A schedule of expected cash collections from sales, by month and in total. c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round "Unit cost" answers to 2 decimal places.) 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 $70,000 (Cash deficiency, repayments and interest should be indicated by a minus sign.) 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. 4. A budgeted balance sheet as of June 30.
Explanation / Answer
(a) Sales Budget April May June Total Budgeted Sales - units 69000 104000 54000 227000 Selling Price per unit 19 19 19 19 Budgeted Sales 1311000 1976000 1026000 4313000 (b) Schedule of cash receipts April May June Total Credit Sales February sales 57000 57000 March Sales 585200 83600 668800 April Sales 262200 917700 131100 1311000 May Sales 395200 1383200 1778400 June Sales 205200 205200 Total Collections 904400 1396500 1719500 4020400 Receivables 1132400 1711900 1018400 1018400 (c) Inventory Purchase Budget April May June Total Budgeted sales units 69000 104000 54000 227000 Add: Desired ending inventory 41600 21600 12000 12000 (40% of next month's cost) Total goods neded 110600 125600 66000 239000 Less: Beginning inventory 27600 41600 21600 27600 Budgeted purchase units 83000 84000 44400 211400 Cost per unit of inventory ($) 6 6 6 6 Total cost of purchases 498000 504000 266400 1268400 (d) Cash payment budget for purchases April May June Total Budgeted Purchases 498000 504000 266400 1268400 Payments: March purchases 120000 120000 April purchases 249000 249000 498000 May purchases 252000 252000 504000 June purchases 133200 133200 Total payments 369000 501000 385200 1255200 Accounts Payable 249000 252000 133200 133200 (e) Operating expenses budget April May June Total Sales commission(4% of sales) 52440 79040 41040 172520 Advertising expense 400000 400000 400000 1200000 Rent expense 38000 38000 38000 114000 Salaries expense 146000 146000 146000 438000 Utilities expense 17000 17000 17000 51000 Insurance expense 5000 5000 5000 15000 Depreciation expense 34000 34000 34000 102000 Total operating expense 692440 719040 681040 2092520 Schedule of cash payments for operating expenses April May June Total Sales commission(4% of sales) 52440 79040 41040 172520 Advertising expense 400000 400000 400000 1200000 Rent expense 38000 38000 38000 114000 Salaries expense 146000 146000 146000 438000 Utilities expense 17000 17000 17000 51000 Cash payment for operating expense 653440 680040 642040 1975520 EARRINGS LIMITED Cash Budget April May June Total Beginning Balance 94000 70960 132920 94000 Add: Cash receipts 904400 1396500 1719500 4020400 Cash available for disbursements 998400 1467460 1852420 4114400 Less: Payments for purchase of inventory 369000 501000 385200 1255200 For operating expenses 653440 680040 642040 1975520 for purchase of equipment 26000 60000 86000 For dividend 30000 30000 for interest 2500 2500 Total payments 1052440 1209540 1087240 3349220 Receipts minus payments -54040 257920 765180 765180 Minimum cash balance 70000 70000 70000 51000 Excess / (Shortage) -124040 187920 695180 714180 Financing activitiy Borrowing / (Repayments) 125000 -125000 0 Repayments 0 0 Total Financing 125000 -125000 0 0 Ending cash balance 70960 132920 765180 765180 EARRINGS LIMITED Contribution margin income statement For the quarter ending June 30 Sales Revenue 4313000 Variable expenses: Cost of goods sold 1362000 Sales commission 172520 Total variable expenses 1534520 Contribution margin 2778480 Fixed expenses: Advertising expense 1200000 Rent expense 114000 Salaries expense 438000 Utilities expense 51000 Insurance expense 15000 Depreciation expense 102000 total operating expenses 1920000 Net operating income 858480 Interest expense 2500 Net income 855980 EARRINGS LIMITED Budgeted Balance sheet as at June 30 Assets Cash 765180 Accounts Receivable 1018400 Inventory 72000 Prepaid insurance 16000 Property and equipment , net Beginning balance, net 1150000 Add: Purchases 86000 1236000 Less: Depreciation 102000 1134000 Total Assets 3005580 Liabilities and owners' equity Accounts Payable 133200 Dividend Payable 30000 Total liabilities 163200 Capital stock 1200000 Retained earnings Balance as at April 1 816400 Net income 855980 1672380 Dividends 30000 1642380 Total Liabilities and equity 3005580
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