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 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—$13 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 company maintains a minimum cash balance of $53,000. 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 $53,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

1. a. A sales budget, by month and in total.

    b. A schedule of expected cash collections, by month and in total.

    c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

    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 $53,000.

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.

January (actual) February (actual) March (actuaL) April (budget) May (budget) 20,600 June (budget) 26,600 July(budget) 40,600 August (budget) 65,600 September (budget) 25,600 50,600 30,600 28,600 100,600 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 $4.30 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: Variable: Sales commissions 4% of sales Fixed: Advertising Rent Salaries Utilities Insurance Depreciation $ 230,000 $ 21,000 s 112,000 $ 8,500 $ 3,300 $ 17,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $17,500 in new equipment during May and $43,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $17,250 each quarter, payable in the first month of the following quarter The company's balance sheet as of March 31 is given below Assets Cash Accounts receivable ($34,580 February sales; $ 77,000 $422,240 March sales) Inventory Prepaid insurance Property and equipment (net) Total assets 456,820 112,832 22,500 980,000 $1,649,152 Liabilities and Stockholders' Equity Accounts payable Dividends payable Common stock Retained earnings $103,000 17,250 860,000 668, 902 $1,649,152 Total liabilities and stockholders' equity

Explanation / Answer

1…a.. Sales Budget April May June Total July Sales Units 65600 100600 50600 216800 30600 S.P.per pair 13 13 13 13 13 Sales Value 852800 1307800 657800 2818400 397800 b. Schedule of expected collections: 20% collections 170560 261560 131560 563680 79560 70% collections 369460 596960 915460 1881880 460460 10% collections 34580 52780 85280 172640 130780 65780 Total collections 574600 911300 1132300 2618200 670800 c. Merchandise Purchase Budget Sales budgeted 65600 100600 50600 216800 30600 Closing stock needed 40240 20240 12240 12240 Total needed 105840 120840 62840 229040 Less: op.stock available 26240 40240 20240 26240 Purchases budgeted 79600 80600 42600 202800 Cost per pair 4.3 4.3 4.3 4.3 4.3 Budgeted $ purchases 342280 346580 183180 872040 0 d. Schedule of expected cash disbursements for merchandise purchases 1st 50% 171140 173290 91590 436020 2nd 50% 103000 171140 173290 447430 91590 Total disbursements 274140 344430 264880 883450 91590 2…. Cash budget Beginning balance 77000 53598 80156 77000 Add: Total sales collections 574600 911300 1132300 2618200 Total cash available 651600 964898 1212456 2695200 Less: Disbursements: For Merchandise purchases 274140 344430 264880 883450 Sales commissions(4%*Sales) 34112 52312 26312 112736 Advertising 230000 230000 230000 690000 Rent 21000 21000 21000 63000 Salaries 112000 112000 112000 336000 Utilities 8500 8500 8500 25500 Equipment purchase 17500 43000 60500 Dividends paid 17250 17250 Total disbursements 697002 785742 705692 2188436 Surplus(Deficit) -45402 179156 506764 506764 Add: Borrowings 99000 99000 Less: Repayments 99000 99000 Less: Interest 1980 1980 Ending balance 53598 80156 504784 504784 3.. Income Statement Sales Revenue 2818400 Less: COGS 932240 Less:Sales commissions4% 112736 Contribution 1773424 Less: Operating expenses: Advertising 690000 Rent 63000 Salaries 336000 Utilities 25500 Insurance(3300*3) 9900 Depreciation(17000*3) 51000 1175400 Net Operating Income 598024 Less:Interest expense 1980 Net Income 596044 4.. Balance Sheet Assets Cash 504784 Accounts receivablesMay--130780; June--526240 657020 Inventory (12240*4.3) 52632 Prepaid Insurance(22500-9900) 12600 Property& Equipment(net)(980000+60500-51000) 989500 Total assets 2216536 Liabilities & stockholders' equity Accounts payable(june 50%) 91590 Dividends payable 17250 Common stock 860000 Retained Earnings (668902+596044-17250) 1247696 Total Liabilities & stockholders' equity 2216536

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