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—$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): January (actual) 21,200 June (budget) 51,200 February (actual) 27,200 July (budget) 31,200 March (actual) 41,200 August (budget) 29,200 April (budget) 66,200 September (budget) 26,200 May (budget) 101,200 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 $4.6 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. Monthly operating expenses for the company are given below: Variable: Sales commissions 4% of sales Fixed: Advertising $ 260,000 Rent $ 24,000 Salaries $ 118,000 Utilities $ 10,000 Insurance $ 3,600 Depreciation $ 20,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $19,000 in new equipment during May and $46,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $19,500 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: Assets Cash $ 80,000 Accounts receivable ($43,520 February sales; $527,360 March sales) 570,880 Inventory 121,808 Prepaid insurance 24,000 Property and equipment (net) 1,010,000 Total assets $ 1,806,688 Liabilities and Stockholders’ Equity Accounts payable $ 106,000 Dividends payable 19,500 Common stock 920,000 Retained earnings 761,188 Total liabilities and stockholders’ equity $ 1,806,688 The company maintains a minimum cash balance of $56,000. 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 $56,000 in cash. Required: 1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: a. A sales budget, by month and in total. b. A schedule of expected cash collections from sales, by month and in total. c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost of purchases to 1 decimal place.) 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. (Cash deficiency, repayments and interest should be indicated by a minus sign.) 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.

Explanation / Answer

Master Budget For the three month period ending on June 30 a) sales Budget April May June Total Sales in units C 66200 101200 51200 218600 Sale price 16 16 16 Sales 1059200 1619200 819200 3497600 b) Expected cash Collection February sales 10%   27200*16*10% 43520 43520 March sales 20% in april & 10% in May of 41200 units *$16 131840 65920 197760 Cash Collected (Same Month) 20% 211840 323840 163840 699520 Cash Collected (Following Month) 70% 741440 1133440 1874880 Cash Collected ( Second Following Month) 10% 105920 105920 Cash Collected 387200 1131200 1403200 2921600 C) Purchase Budget March Opening Inventory A 26480 40480 20480 87440 10880 Purchases C+B-A 80200 81200 43200 204600 42800 Closing Inventory (40% of following month sales) B 40480 20480 12480 73440 26480 Purchase price 4.6 4.6 4.6 4.6 Cost of purchases 368920 373520 198720 941160 196880 d)Cash Disbursements Paid 50% in same month 184460 186760 99360 470580 50% in following month 98440 184460 186760 469660 Total 282900 371220 286120 940240 Variable Expenses 42368 64768 32768 139904 advertising 26000 26000 26000 78000 Rent 24000 24000 24000 72000 salaries 118000 118000 118000 354000 Utilities 10000 10000 10000 30000 Payment of dividend 19500 19500 Equipment Purchase 19000 46000 65000 There are various sub parts so I have answered a,b, c d of part 1

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