You have just been hired as a new management trainee by Earrings Unlimited, a di

ID: 2555607 • 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—$15 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 $4.5 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.

The company plans to purchase $18,500 in new equipment during May and $45,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $18,750 each quarter, payable in the first month of the following quarter.

The company maintains a minimum cash balance of $55,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

Explanation / Answer

1 (a) Sales budget April May June Quarter Budgeted unit sales 66000 101000 51000 Selling price per unit 15 15 15 Total sales 990000 1515000 765000 3270000 (b) Schedule of expectd cash collectons April May June Quarter February sales 2700 2700 (27000*10%) March sales 28700 4100 32800 (41000*70%) (41000*10%) April sales 13200 46200 6600 66000 (66000*20%) (66000*70%) (66000*10%) May sales 20200 70700 90900 (101000*20%) (101000*70%) June sales 10200 10200 (51000*20%) Total cash collections 44600 70500 87500 202600 © Merchandise purchase budget April May June Quarter Budgetd unit sales 66000 101000 51000 218000 Add: Ending inventory 40400 20400 12400 73200 (101000*40%) (51000*40%) (31000*40%) Total needs 106400 121400 63400 291200 Less: Beginning inventory 26400 40400 20400 87200 (66000*40%) (101000*40%) (51000*40%) Required purchases 80000 81000 43000 204000 Unit cost 4.5 4.5 4.5 Required $ purchase 360000 364500 193500 918000 Ending inventory=40% of following moth sales (d) Budgetd cash disbursements for merchandise purchases April May June Quarter Accounts payable 105000 105000 April Purchases 180000 180000 360000 (360000*1/2) (360000*1/2) May Purchases 182250 182250 364500 (364500*1/2) (364500*1/2) June Purchases 96750 96750 (193500*1/2) Total cash payments 285000 362250 279000 926250

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You have just been hired as a new management trainee by Earrings Unlimited, a di

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