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—$10 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 30% of the earrings sold in the following month.

Suppliers are paid $4 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 30% of a month's sales are collected in the month of sale. An additional 60% 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 maintains a minimum cash balance of $60,000. 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 $60,000 in cash.

2nd part to follow:

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

Morning. Ok well I went through some of the figures and think I did the budgeted cash disbursements for merchandise purchases correctly. I also started n on the 3 month cash budget. I am hungup now here. I understand that all money financed is to be paid in full in the following month. However as the mth of may unfolds I come to see that we have a surplus of cash this month ($76400) however when we pay back previous mth finance we are at a point of needing to finance money to cover next mth,]

or

MERCHANDISE PURCHASES BUDGET:April May June QuarterBudgeted unit sales 65,000 100,000 50,000 215,000Add desired ending inventory 40,000 20,000 12,000 12,000Total needs 105,000 120,000 62,000 227,000Less beginning inventory 26,000 40,000 20,000 26,000Required purchases 79,000 80,000 42,000 201,000Cost of purchases @ $4 per unit $316,000.00 $320,000.00 $168,000.00 $804,000.00BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES:April May June QuarterAccounts payable $100,000.00 $100,000.00April pu

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