You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2475302 • 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—$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):
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 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 $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.
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.
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
Solution:
1)
(a) A sales budget, by month and in total.
A sales budget, by month and in total.
April
May
June
Total
Budgeted Sales Units
65,000
100,000
50,000
215,000
Sale Price per unit
$10
$10
$10
$10
Budgeted Sales in Dollars
$650,000
$1,000,000
$500,000
$2,150,000
(b) A schedule of expected cash collections from sales, by month and in total.
A schedule of expected cash collections from sales, by month and in total.
April
May
June
Total
Schedule of Cash Collection
February Month Sale
$26,000
March Month Sale
$280,000
$40,000
April Month Sales
$130,000
$455,000
$65,000
May Month Sales
$200,000
$700,000
June Month Sale
$100,000
Total Collection
$436,000
$695,000
$865,000
$1,996,000
Working note for schedule of cash collection
Jan
Feb
Mar
Apr
May
June
July
Budgeted Sales Units
20,000
26,000
40,000
65,000
100,000
50,000
30,000
Sale Price per uni
$10
$10
$10
$10
$10
$10
$10
Budgeted Sales in Dollars
$200,000
$260,000
$400,000
$650,000
$1,000,000
$500,000
$300,000
Schedule of Cash Collection
January Month Sale
40000
140000
20000
February Month Sale
$52,000
$182,000
$26,000
March Month Sale
$80,000
$280,000
$40,000
April Month Sales
$130,000
$455,000
$65,000
May Month Sales
$200,000
$700,000
$100,000
June Month Sale
$100,000
$350,000
Total Collection
$40,000
$192,000
$282,000
$436,000
$695,000
$865,000
$450,000
C) A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
Question is incomplete --- It does not have the information about ending inventory which company maintain per month. Please provide the same accordingly further question will be solved..
A sales budget, by month and in total.
April
May
June
Total
Budgeted Sales Units
65,000
100,000
50,000
215,000
Sale Price per unit
$10
$10
$10
$10
Budgeted Sales in Dollars
$650,000
$1,000,000
$500,000
$2,150,000
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