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 decded to prepare compreheve budgets for the upcoming second quarter in order to show management the benefits that can be galned from an integrated budgeting program. To this end, you have worked wlth accounting and other areas to gather the Infomation assembled below. The compary sells many styles of earrings, but all are sold for the same price $17 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) Febnuary (actual) March (actual) April (buct) May buket) 22,600 June budget) 2B,6D July bngety 42,600August (udget) 67,600 Seplember (bigcl) 102,600 2 G00 2 6600 30 600 27,600 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 $5.3 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 folowing 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 colected in the month of sale. An additional 70% is oollected in the following month, and the emaining 10% is collected in the second month following sale. Bad dests have been negligible. Monthly operating expenses for the company are given below Vanable 4% of sales Fixed viverlisin Rent Salaries Utiities Insurance Deprecistion 330,000 S 31,000 S 132,000 S 13,500 $ 4,300 $ 21 D Insurance Is pald on an annual basls, In November of each year The company plans to purchase $22,500 in new equipment during May and S53,000 in new equipment during June; both purchases will be for cash. The company declares dividends of 524,750 each quarter, payable in the first month of the following quarter. A listing of the company's ledger accounts as of March 31 is given below:

Explanation / Answer

Answer a Sales Budget April May June Total Sales in Units                67,600              102,600                 52,600              222,800 Sp Per Unit                        17                         17                         17                         17 Total Sales in $          1,149,200          1,744,200              894,200          3,787,600 Answer b Schedule of Expected Cash Collections from Sales April May June Total Collection from Accounts Receivables Feb Sales                48,620                48,620 March Sales              506,940                72,420                          -                579,360 April Sales              229,840              804,440              114,920          1,149,200 May Sales              348,840           1,220,940          1,569,780 June Sales Sales              178,840              178,840 Total cash Collections              785,400          1,225,700           1,514,700          3,525,800 Answer c Merchandise Purchase Budget April May June Total Sales In units                67,600              102,600                 52,600              222,800 Add: Closing Inventory in units                41,040                21,040                 13,040                13,040 Total Needs              108,640              123,640                 65,640              235,840 Less: opening Inventory in uints              (27,040)              (41,040)              (21,040)              (27,040) Required Purchases in Units                81,600                82,600                 44,600              208,800 Price per paid of Earings                     5.30                     5.30                     5.30                     5.30 Total Purchases in $              432,480              437,780              236,380          1,106,640 Answer d Schedule of Cash payments to Suppliers April May June Total Cash Payment Accounts Payable - March              113,000              113,000 April Purchases              216,240              216,240              432,480 May Purchases              218,890              218,890              437,780 June Purchases              118,190              118,190 Total Cash Payment to Suppliers              329,240              435,130              337,080          1,101,450 Answer e Selling & Admn. Budget April May June Total Sales Comm. - 4%                45,968                69,768                 35,768              151,504 Fixed Advt.              330,000              330,000              330,000              990,000 Rent (Fixed)                31,000                31,000                 31,000                93,000 Salary Expense              132,000              132,000              132,000              396,000 Utilities                13,500                13,500                 13,500                40,500 Insurance                  4,300                   4,300                   4,300                12,900 Dep.                27,000                27,000                 27,000                81,000 Total              583,768              607,568              573,568          1,764,904 Schedule of Cash payments of Selling & Admn. Budget April May June Total Sales Comm. - 4%                45,968                69,768                 35,768              151,504 Fixed Advt.              330,000              330,000              330,000              990,000 Rent (Fixed)                31,000                31,000                 31,000                93,000 Salary Expense              132,000              132,000              132,000              396,000 Utilities                13,500                13,500                 13,500                40,500 Total              552,468              576,268              542,268          1,671,004 Cash budget April May June Total Opening cash Balance                87,000                63,942              255,744                87,000 Add: receipts Collection from Customers              785,400          1,225,700           1,514,700          3,525,800 Total Cash available              872,400          1,289,642           1,770,444          3,612,800 Less: Disbursements Cash Disbursement - Accounts Payable              329,240              435,130              337,080          1,101,450 Selling & Admn. Exp.              552,468              576,268              542,268          1,671,004 Purchase of Equipment                         -                  22,500                 53,000                75,500 Dividend Paid                24,750                          -                            -                  24,750 Total Disbursement              906,458          1,033,898              932,348          2,872,704 Cash Balance Closing              (34,058)              255,744              838,096              740,096 Add: Finance from Bank                98,000                          -                  98,000 Less: Payment to Bank                         -                            -                (98,000)              (98,000) Less: Payment of interet - Bank loan                         -                            -                   (2,940)                (2,940) Net Cash Balance Closing                63,942              255,744              737,156              737,156 Income Statement For the Qtr Ending June 30 Sales          3,787,600 Less: Variable Cost Cost of Goods Sold - 222,800 Units X $5.3          1,180,840 Sales Comm. - 4 % of Sales              151,504          1,332,344 Contribution          2,455,256 Less: Fixed Cost Advt.              990,000 Rent (Fixed)                93,000 Salary Expense              396,000 Utilities                40,500 Insurance                12,900 Dep.                81,000          1,613,400 Operating Profit              841,856 Less: Interest Expenses                   2,940 Net Income              838,916 Balance Sheet As on June 30 Assets Current Assets Cash              737,156 Accounts receivables              889,780 Prepaid Insurance                14,600 Inventory                69,112          1,710,648 Fixed Assets Property & Equipment          1,155,500 Less: Dep.              (81,000)          1,074,500 Total Assets          2,785,148 Liabilities Accounts Payable              118,190 Dividends Payable                24,750 Total liabilities              142,940 Shareholders's Equity Common Stock          1,060,000 Retained Earnings          1,582,208 Total Stockholders equity          2,642,208 Total liabilities & Stockholders' Equity          2,785,148                          -   Schedule of Retained Earnings As on June 30 Opening Balance              768,042 Add: net income              838,916 Less: Dividend declared              (24,750) Closing Balance          1,582,208

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