You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2578094 • 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—$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 $4.90 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 $20,500 in new equipment during May and $49,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,750 each quarter, payable in the first month of the following quarter.
Selected items from the company’s March 31 balance sheet are as follows:
The company maintains a minimum cash balance of $59,000. 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 $59,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
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 $59,000.
January (actual) 21,800 June (budget) 51,800 February (actual) 27,800 July (budget) 31,800 March (actual) 41,800 August (budget) 29,800 April (budget) 66,800 September (budget) 26,800 May (budget) 101,800Explanation / Answer
Answer a Sales Budget April May June Total Sales in Units 66,800 101,800 51,800 220,400 Sp Per Unit 15 15 15 15 Total Sales in $ 1,002,000 1,527,000 777,000 3,306,000 Answer b Schedule of Expected Cash Collections from Sales April May June Total Collection from Accounts Receivables Feb Sales 41,700 41,700 March Sales 438,900 62,700 - 501,600 April Sales 200,400 701,400 100,200 1,002,000 May Sales 305,400 1,068,900 1,374,300 June Sales Sales 155,400 155,400 Total cash Collections 681,000 1,069,500 1,324,500 3,075,000 Answer c Merchandise Purchase Budget April May June Total Sales In units 66,800 101,800 51,800 220,400 Add: Closing Inventory in units 40,720 20,720 12,720 12,720 Total Needs 107,520 122,520 64,520 233,120 Less: opening Inventory in uints (26,720) (40,720) (20,720) (26,720) Required Purchases in Units 80,800 81,800 43,800 206,400 Price per paid of Earings 4.90 4.90 4.90 4.90 Total Purchases in $ 395,920 400,820 214,620 1,011,360 Answer d Schedule of Cash payments to Suppliers April May June Total Cash Payment Accounts Payable - March 109,000 109,000 April Purchases 197,960 197,960 395,920 May Purchases 200,410 200,410 400,820 June Purchases 107,310 107,310 Total Cash Payment to Suppliers 306,960 398,370 307,720 1,013,050 Answer e Selling & Admn. Budget April May June Total Sales Comm. - 4% 40,080 61,080 31,080 132,240 Fixed Advt. 290,000 400,000 400,000 1,090,000 Rent (Fixed) 27,000 27,000 27,000 81,000 Salary Expense 124,000 124,000 124,000 372,000 Utilities 11,500 11,500 11,500 34,500 Insurance 3,900 3,900 3,900 11,700 Dep. 23,000 23,000 23,000 69,000 Total 519,480 650,480 620,480 1,790,440 Schedule of Cash payments of Selling & Admn. Budget April May June Total Sales Comm. - 4% 40,080 61,080 31,080 132,240 Fixed Advt. 290,000 400,000 400,000 1,090,000 Rent (Fixed) 27,000 27,000 27,000 81,000 Salary Expense 124,000 124,000 124,000 372,000 Utilities 11,500 11,500 11,500 34,500 Total 492,580 623,580 593,580 1,709,740 Cash budget April May June Total Opening cash Balance 83,000 59,710 86,760 83,000 Add: receipts Collection from Customers 681,000 1,069,500 1,324,500 3,075,000 Total Cash available 764,000 1,129,210 1,411,260 3,158,000 Less: Disbursements Cash Disbursement - Accounts Payable 306,960 398,370 307,720 1,013,050 Selling & Admn. Exp. 492,580 623,580 593,580 1,709,740 Purchase of Equipment - 20,500 49,000 69,500 Dividend Paid 21,750 - - 21,750 Total Disbursement 821,290 1,042,450 950,300 2,814,040 Cash Balance Closing (57,290) 86,760 460,960 343,960 Add: Finance from Bank 117,000 - 117,000 Less: Payment to Bank - - (117,000) (117,000) Less: Payment of interet - Bank loan - - (3,510) (3,510) Net Cash Balance Closing 59,710 86,760 340,450 340,450
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