You have just been hired as a new management trainee by Earrings Unlmited, a dis
ID: 2375234 • Letter: Y
Question
You have just been hired as a new management trainee by Earrings Unlmited, 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 informaiton assembled below.
The company sells many styles of earrings, but all are sold for the same price-- $14 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)- 20,900 February (actual)- 26,900 March (actual)- 40,900 April (budget)- 65,900 May (budget)- 100,900 June (budget)- 50,900 July (budget)- 30,900, August (budget)- 28,900 and September (budget)- 25,900
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 $8 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchasel 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 months sales are collected in the month of sale. An additional 60% is collected in the following month, and the remained 20% is collected in the second month following the sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Variable:
Sales commissions: 4% of sales
Fixed:
Advertising: $199,100
Rent: $17,100
Salaries: $105,100
Utilities: $6,100
Insurance: $2,100
Depreciation: $13,100
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $15,300 in new equipment during May and $39,100 in new equipment during June; both purchases will be for cash. The company delcares dividends of $10,500 each quarter, payable in the first month of the following quarter.
A list of the company's ledger accounts as of March 31 is given below:
Assets:
Cash- $150,000
Accounts receivable ($75,320 February sales; $458,080 March sales)- $533,400
Inventory- $158,160
Prepaid insurance- $21,900
Property and equipment (net)- $819,640
TOtal Assets- $1,683,100
Liabilities and Stockholders Equity:
Accounts Payable- $193,600
Dividends payable- $10,500
Capital Stock- $890,000
Retained Earnings- $589,000
Total Liabilities- $1,683,100
The company maintains a minimum cash balance of $30,000. 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 of 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 retained at least $30,000 in cash.
(A)- A sales budget, by month and in total.
Budgeted Sales in units-
April- 65900
May- 100,900
June- 50900
Quarter- 217700
Selling price per unit is $14.
Total Sales: 922600 (April), 1412600 (May), 712600 (June), 3047800 (Quarter)
(B)A schedule of expected cash collections from sales, by month and in total.
February- 75320
March- 343560 (April), 114520 (May)
April- 184520 (April), 553560 (May), 184520 (June)
May- 282520 (May), 847560 (June)
June- 142520 (june)
(C)A merchandise purchases budget in units and in dollars.
Required unit purchases for April, May, June and Quarter
REquired dollar purchases for April, May, June, and Quarter.
(d) A Schedule of expected cash disbursements for merchandise purchases by month and in total.
Accounts payable for April, May, June, and Quarter
April Purchases for April, May, June, and Quarter
May purchases for April, May, June, and Quarter
June purchases for April, May, June, and Quarter
I really need help with c and d. Please help me better understand so I can work these types of problems on my own.
Explanation / Answer
MERCHANDISE PURCHASES BUDGET:
April May June Quarter
Budgeted unit sales 65,000 100,000 50,000 215,000
Add desired ending inventory 40,000 20,000 12,000 12,000
Total needs 105,000 120,000 62,000 227,000
Less beginning inventory 16,000 40,000 20,000 16,000
Required purchases 89,000 80,000 42,000 211,000
Cost of purchases @ $4 per unit $356,000.00 $320,000.00 $168,000.00 $844,000.00
BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES:
April May June Quarter
Accounts payable $80,000.00 $80,000.00
April purchases $130,000.00 $130,000.00 $260,000.00
May purchases $200,000.00 $200,000.00 $400,000.00
June purchases $100,000.00 $100,000.00
Total cash payments $210,000.00 $330,000.00 $300,000.00 $340,000.00
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