You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2427227 • 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—$18 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 $5.4 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 $23,000 in new equipment during May and $54,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $25,500 each quarter, payable in the first month of the following quarter.
The company maintains a minimum cash balance of $64,000. 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 $64,000 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. (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
Master Budget For the three month period ending on June 30 a) sales Budget April May June Total in $ Sales in units C 67800 102800 52800 223400 Sale price 18 18 18 Sales 1220400 1850400 950400 4021200 b) Expected cash Collection February sales 51840 51840 March sales 70% in april & 10% 539280 77040 616320 Total March Sales=42800*18 770400 Cash Collected (Same Month) 20% 244080 370080 190080 804240 out of which 20% received in March 154080 Cash Collected (Following Month) 70% 854280 1295280 2149560 Balance 616320 Cash Collected ( Second Following Month) 10% 122040 122040 Cash Collected 835200 1301400 1607400 3744000 C) Purchase Budget March Opening Inventory A 27120 41120 21120 89360 17120 42800*40% Purchases C+B-A 81800 82800 44800 209400 37200 Closing Inventory (40% of following month sales) B 41120 21120 13120 75360 27120 102800*40% 52800*40% 32800*40% 67800*40% Purchase price 5.4 5.4 5.4 5.4 Cost of purchases 441720 447120 241920 1130760 200880 d)Cash Disbursements Paid 50% in same month 220860 223560 120960 565380 50% in following month 100440 220860 223560 544860 200880*50% Total 321300 444420 344520 1110240 Cash Budget April May June Total Opening Balance 88000 64184 299748 Cash Collection 835200 1301400 1607400 3744000 Less: Cash disbursments 321300 444420 344520 1110240 Sales Commisions 48816 74016 38016 160848 advertising 340000 340000 340000 1020000 Rent 32000 32000 32000 96000 salaries 134000 134000 134000 402000 Utilities 14000 14000 14000 42000 Insurance 4400 4400 4400 13200 Payment of dividend 25500 25500 Equipment Purchase 23000 54000 77000 Balance Left 3184 299748 946212 Borrowings with min cash balance 64000 in 1000 multiple 61000 Closing cash balnce 64184 299748 Repayment of borrowing 61000 Interest 1830 Ending balance 883382 883382 There are various sub parts so I have answered a,b, c d of part 1 AND q 2
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