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 earring 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- $10 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)... 20,000 June (budget)... 50,000
February (actual)... 26,000 July (budget)... 30,000
March (actual)... 40,000 August (budget ... 28,000
April (budget)... 65,000 September (budget) 25,000
May (budget)... 100,000

The concentration of sales before and during May is due to Mothers 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 for a pair of earrings. One-half of a months purchases are 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 months 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.....................$200,000
Rent................................18,800
Salaries........................106,000
Utilities.........................7,000
Insurance......................3,000
depreciation.................14,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.

A listing of the companys ledger accounts as of March 31 is given below:

Assets
Cash.............................................................................$ 74,000
Accounts Receivable($26,000 February sales; $320,000
March Sales)................................. 346,000
Inventory...................................................................... 104,000
Prepaid insurance......................................................... 21,000
Property and equipment(net)....................................... 950,000
Total Assets................................................................. $1,495,000

Liabilities and Stockholders Equity
Accounts Payable.........................................................$ 100,000
Dividends Payable......................................................... 15,000
Capital stock................................................................. 800,000
Retained Earnings......................................................... 580,000
Total liabilities and stockholders equity $1,495,000

The company maintains a minimum cash balance of $50,000. 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 $50,000 in cash.

Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

Required
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

1. 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.
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.

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

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

SALES BUDGET:
April May June Quarter
Budgeted unit sales 65,000 100,000 50,000 215,000
Selling price per unit 10 10 10 10
Total Sales 650,000 1,000,000 500,000 2,150,000


SCHEDULE OF EXPECTED CASH COLLECTIONS:
April May June Quarter
February sales 26000 2,600 2,600
March sales 40000 28,000 400,000 428,000
April sales 65000 13,000 45,500 6,500 65,000
May sales 100000 20,000 70,000 90,000
June sales 50000 10,000 10,000
Total Cash Collections 43,600 465,500 86,500 595,600


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 356,000 320,000 168,000 844,000


BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES:
April May June Quarter
Accounts payable
April purchases
May purchases
June purchases
Total cash payments


EARRINGS UNLIMITED
CASH BUDGET
FOR THE THREE MONTHS ENDING JUNE 30
April May June Quarter
Cash balance 50,000 50,000 50,000 50,000
Add collections from customers 43,600 465,500 86,500 595,600
Total cash available 93,600 515,500 136,500 745,600

Less Disbursements
Merchandise purchases
Advertising 200,000 200,000 200,000 200,000
Rent 18,000 18,000 18,000 18,000
Salaries 106,000 106,000 106,000 106,000
Commissions 2,600 4,000 2,000 8,600
Utilities 7,000 7,000 7,000 7,000
Equipment purchases 16,000 40,000
Dividends paid 15,000
Total Disbursements 348,600 351,000 373,000 339,600

Excess (deficiency) of receipts
over disbursements
Financing:
Borrowings
Repayments
Interest
Total financing

Cash balance, ending


EARRINGS UNLIMITED
BUDGETED INCOME STATEMENT
FOR THE THREE MONTHS ENDED JUNE 30

Sales -
Variable expenses:
Cost of goods sold -
Commissions - -
Contribution Margin -
Fixed expenses:
Advertising -
Rent -
Salaries -
Utilities -
Insurance -
Depreciation - -
Net operating income -
Interest expense -
Net income -


EARRINGS UNLIMITED
BUDGETED BALANCE SHEET
JUNE 30

Assets:

Cash
Accounts receivable (see below)
Inventory
Prepaid insurance
Property and equipment, net
Total assets


Liabilities and Stockholders' Equity

Accounts payable, purchases
Dividends payable
Capital stock
Retained earnings (see below)
Total liabilities and stockholders' equity


Accounts receivable at June 30:
May sales x ?%
June sales x ?%
Total


Retained earnings at June 30:
Balance, March 31
Add net income
Total
Less dividends declared
Balance, June 30

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