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-$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) January (actual) February (actual) March (actual) April (budget) May (budget) 22,200 June (budget) 28,200 July (budget) 42,200 August (budget) 67,200 September (budget) 102,200 52,200 32,200 30,200 27,200 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 $5.1 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 xed Advertising Rent Salaries Utilities Insurance Depreciation $ 310,000 $ 29,000 $128,000 $ 12,500 $ 4,100 $ 25,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $21,500 in new equipment during May and $51,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $23,250 each quarter, payable in the first month of the following quarter

Explanation / Answer

Earrings Unlimited Budgeted Income Statement For the three months ended june 30 Description Amount Amount Workings Sales 3093000 (206200 * 15) Supplier Expenses 1058760 (207600*5.1) Opening Stock 137088 (26880*5.1) Closing Stock -65688 (12880*5.1) Variable Cost of goods manufactured 1130160 Sales comission 123720 (3093000*0.04) Variable Cost of goods sold 1253880 Contribution 1839120 Advertising 930000 310000*3 Rent 87000 29000*3 Salaries 384000 128000*3 Utilities 37500 12500*3 Insurance 12300 4100*3 o Depreciation 75000 25000*3 Fixed Expenses 1525800 Gross Income 313320 Dividend 23250 Interest Charges 537 0.01 % per month on 173000 for 2 months & 299000 for 1 month Admin & Other Expenses 23787 Net Income 289533

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