You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2447073 • 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—$20 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 $5.6 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.
The company plans to purchase $24,000 in new equipment during May and $56,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,000 each quarter, payable in the first month of the following quarter.
The company maintains a minimum cash balance of $66,000. 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 $66,000 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
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: Sales budget: April May June Total Budgeted sales in units $ 68,200 $ 43,200 $ 68,200 $ 179,600 Selling price per unit $ 20 $ 20 $ 20 $ 20 Total sales $ 1,364,000 $ 864,000 $ 1,364,000 $ 3,592,000 Schedule of expected cash collections: February March April May June Total 584000 864000 1364000 2064000 1064000 Cash Collection 20% of a month’s sales are collected in the month of sale. 116800 172800 272800 412800 212800 1188000 additional 70% is collected in the following month 604800 954800 1444800 3004400 10% is collected in the second month following sale 58400 86400 136400 281200 936000 1454000 1794000 4473600 A merchandise purchases budget in units and in dollars. Show the budget by month and in total. April May June July Budgeted sales in units 68200 103200 53200 33200 Add budgeted ending inventory 40% of the earrings sold in the following month 41280 21280 13280 Total needs 105000 105000 105000 Less beginning inventory 43200 68200 103200 Required unit purchases 61800 36800 1800 Unit cost 5.6 5.6 5.6 Required dollar purchases 346080 206080 10080 Cash Budget April May June Cash balance, beginning 90000 66000 66000 Add receipts from customers 936000 1454000 1794000 Total cash available 1026000 1520000 1860000 Less disbursements: Purchase of inventor 346080 206080 10080 Sales commissions 4% of sales $ 54,560 $ 34,560 $ 54,560 Advertising 360000 360000 360000 Rent 34000 34000 34000 Salaries and wages 138000 138000 138000 Utilities 15000 15000 15000 Dividends paid 27000 Land purchases 24000 equipment 56000 Total Disbursment 974640 811640 667640 Excess (deficiency) of receiptsover disbursements 51360 708360 1192360
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