You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2393713 • 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 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—$16 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 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 $21,000 in new equipment during May and $50,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $22,500 each quarter, payable in the first month of the following quarter.
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.
A schedule of expected cash disbursements for merchandise purchases, by month and in total.
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 $60,000 (Cash deficiency, repayments and interest should be indicated by a minus sign.)
A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
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
2.
Interest = $91000 x 1% x 3 months = $2730
3.
4.
Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Beginning cash balance $ 84000 60720 244940 84000 Add collections from customers 729600 1144000 1416000 3289600 Total cash available 813600 1204720 1660940 3373600 Less cash disbursements: Merchandise purchases 312500 407500 315000 1035000 Advertising 300000 300000 300000 900000 Rent 28000 28000 28000 84000 Salaries 126000 126000 126000 378000 Commissions 42880 65280 33280 141440 Utilities 12000 12000 12000 36000 Equipment purchases 0 21000 50000 71000 Dividends paid 22500 0 0 22500 Total cash disbursements 843880 959780 864280 2667940 Excess (deficiency) of cash available over disbursements -30280 244940 796660 705660 Financing: Borrowings 91000 0 0 91000 Repayments 0 0 -91000 -91000 Interest 0 0 -2730 -2730 Total financing 91000 0 -93730 -2730 Ending cash balance $ 60720 244940 702930 702930Related Questions
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