You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2407987 • 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 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—$15 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 $4.90 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:
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $20,500 in new equipment during May and $49,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,750 each quarter, payable in the first month of the following quarter.
The company’s balance sheet as of March 31 is given below:
The company maintains a minimum cash balance of $59,000. 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 $59,000 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 $59,000.
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) 21,800 June (budget) 51,800 February (actual) 27,800 July (budget) 31,800 March (actual) 41,800 August (budget) 29,800 April (budget) 66,800 September (budget) 26,800 May (budget) 101,800Explanation / Answer
Per Chegg guidelines, 4 sub-parts have been answered.
1a. Earrings Unlimited Sales Budget April May June Quarter Budgeted sales units 66800 101800 51800 220400 Selling price per unit $ 15 15 15 15 Total sales $ 1002000 1527000 777000 3306000 1b. Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February sales 41700 41700 March sales 438900 62700 501600 April sales 200400 701400 100200 1002000 May sales 305400 1068900 1374300 June sales 155400 155400 Total cash collections $ 681000 1069500 1324500 3075000 1c. Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted unit sales 66800 101800 51800 220400 Add: Desired ending merchandise inventory 40720 20720 12720 12720 Total needs 107520 122520 64520 233120 Less: Beginning merchandise inventory 26720 40720 20720 26720 Required purchases 80800 81800 43800 206400 Unit cost $ 4.90 4.90 4.90 4.90 Required dollar purchases $ 395920 400820 214620 1011360 1d. Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable 109000 109000 April purchases 197960 197960 395920 May purchases 200410 200410 400820 June purchases 107310 107310 Total cash payments $ 306960 398370 307720 1013050Related Questions
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