You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2436843 • 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—$14 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) 21,600 June (budget) 51,600 February (actual) 27,600 July (budget) 31,600 March (actual) 41,600 August (budget) 29,600 April (budget) 66,600 September (budget) 26,600 May (budget) 101,600
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—$14 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)
21,600
June (budget)
51,600
February (actual)
27,600
July (budget)
31,600
March (actual)
41,600
August (budget)
29,600
April (budget)
66,600
September (budget)
26,600
May (budget)
101,600
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 $4.80 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:
Variable:
Sales commissions
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—$14 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)
21,600
June (budget)
51,600
February (actual)
27,600
July (budget)
31,600
March (actual)
41,600
August (budget)
29,600
April (budget)
66,600
September (budget)
26,600
May (budget)
101,600
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 $4.80 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:
Variable:
Sales commissions
4
% of sales
Fixed:
Advertising
$
280,000
Rent
$
26,000
Salaries
$
122,000
Utilities
$
11,000
Insurance
$
3,800
Depreciation
$
22,000
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $20,000 in new equipment during May and $48,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,000 each quarter, payable in the first month of the following quarter.
The company’s balance sheet as of March 31 is given below:
Assets
Cash
$
82,000
Accounts receivable ($38,640 February sales; $465,920 March sales)
504,560
Inventory
127,872
Prepaid insurance
25,000
Property and equipment (net)
1,030,000
Total assets
$
1,769,432
Liabilities and Stockholders’ Equity
Accounts payable
$
108,000
Dividends payable
21,000
Common stock
960,000
Retained earnings
680,432
Total liabilities and stockholders’ equity
$
1,769,432
The company maintains a minimum cash balance of $58,000. 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 $58,000 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 $58,000.
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.
4
% of sales
Fixed:
Advertising
$
280,000
Rent
$
26,000
Salaries
$
122,000
Utilities
$
11,000
Insurance
$
3,800
Depreciation
$
22,000
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $20,000 in new equipment during May and $48,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,000 each quarter, payable in the first month of the following quarter.
The company’s balance sheet as of March 31 is given below:
Assets
Cash
$
82,000
Accounts receivable ($38,640 February sales; $465,920 March sales)
504,560
Inventory
127,872
Prepaid insurance
25,000
Property and equipment (net)
1,030,000
Total assets
$
1,769,432
Liabilities and Stockholders’ Equity
Accounts payable
$
108,000
Dividends payable
21,000
Common stock
960,000
Retained earnings
680,432
Total liabilities and stockholders’ equity
$
1,769,432
The company maintains a minimum cash balance of $58,000. 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 $58,000 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 $58,000.
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.
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 $4.80 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: Variable: Sales commissions 4 % of sales Fixed: Advertising $ 280,000 Rent $ 26,000 Salaries $ 122,000 Utilities $ 11,000 Insurance $ 3,800 Depreciation $ 22,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $20,000 in new equipment during May and $48,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet as of March 31 is given below: Assets Cash $ 82,000 Accounts receivable ($38,640 February sales; $465,920 March sales) 504,560 Inventory 127,872 Prepaid insurance 25,000 Property and equipment (net) 1,030,000 Total assets $ 1,769,432 Liabilities and Stockholders’ Equity Accounts payable $ 108,000 Dividends payable 21,000 Common stock 960,000 Retained earnings 680,432 Total liabilities and stockholders’ equity $ 1,769,432 The company maintains a minimum cash balance of $58,000. 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 $58,000 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 $58,000. 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)
21,600
June (budget)
51,600
February (actual)
27,600
July (budget)
31,600
March (actual)
41,600
August (budget)
29,600
April (budget)
66,600
September (budget)
26,600
May (budget)
101,600
Explanation / Answer
Mothers day 1 Sales budget April May June Quarter Sales 932400 1422400 722400 3077200 2 Budgeted Cash receipt April May June Quarter February sales 38640 38640 March sale 407680 58240 465920 April sales 186480 652680 93240 932400 May sales 284480 995680 1280160 June sales 144480 144480 Total collection 632800 995400 1233400 2861600 3 Production budget April May June Total Sales in units 66,600 1,01,600 51,600 2,19,800 Add ending inventory 40,640 20,640 12,640 12,640 Inventory needed 1,07,240 1,22,240 64,240 2,32,440 Less beginning inventory 26,640 40,640 20,640 26,640 Required Purchase 80,600 81,600 43,600 2,05,800 Cost of purchase @4.8 per unit 386880 391680 209280 823200 4 Cash Disbursement April May June Total March purchase 108000 108000 April purchase 193440 193440 386880 May purchase 195840 195840 391680 June purchase 104640 104640 Total disbursements 301440 389280 300480 991200
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