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—$18 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 $5.9 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 $25,500 in new equipment during May and $59,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $29,250 each quarter, payable in the first month of the following quarter.

     The company maintains a minimum cash balance of $69,000. 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 $69,000 in cash.

A schedule of expected cash disbursements for merchandise purchases, by month and in total.

PLEASE ANSWER B-D!

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.

Explanation / Answer

B. A SCHEDULE OF EXPECTED CASH COLLECTIONS EARNING LIMITED SCHEDULE OF EXPECTED CASH COLLECTIONS april may june quarter FEB SALES 2980 0 0 2980 MARCH SALES 30660 4380 0 35040 APRIL SALES 13760 48160 6880 68800 MAY SALES 0 20760 72660 93420 JUNE SALES 0 0 10760 10760 Total cash collections 47400 73300 90300 211000 C. EARNINGS LIMITED MERCHANDISE PURCHASE BUDGET april may june quarter Budgeted unit sales 3822 5767 2988 12577 add:desired ending inventory 2307 1195 751 4253 Total Needs 6129 6962 3739 16830 Less:beginning inventory 0 0 0 0 Required Purchases 6129 6962 3739 16820 Unit Cost $5.90 $5.90 $5.90 $5.90 Required Dollar Purchases 36161.1 41075.8 22060 99238 D EARNINGS LIMITED BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES april may june quarter accounts payable sales commision 2752 4152 2152 9056 advertising 390000 390000 390000 1170000 rent 37000 37000 37000 111000 salaries 144000 144000 144000 432000 utilities 16500 16500 16500 49500 insurance 0 0 0 0 depreciation 33000 33000 33000 99000 equipment purchase 0 25500 59000 84500 Dividend paid 29250 0 0 29250 Interest paid on loan 10 0 0 10 Total cash disbursements 652512 650152 681652 1984316

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