You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2514542 • 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—$15 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 $4.50 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:
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $18,500 in new equipment during May and $45,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $18,750 each quarter, payable in the first month of the following quarter.
Selected items from the company’s March 31 balance sheet are as follows:
The company maintains a minimum cash balance of $55,000. 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 $55,000 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 $55,000.
January (actual) 21,000 June (budget) 51,000 February (actual) 27,000 July (budget) 31,000 March (actual) 41,000 August (budget) 29,000 April (budget) 66,000 September (budget) 26,000 May (budget) 101,000Explanation / Answer
1A Sales Budget: Particulars April May June Total Sales Budget In Units 66000 101000 51000 218000 Sales Budget In Value 990000 1515000 765000 3270000 Total 990000 1515000 765000 3270000 1B Cash Collection Budget: Particulars April May June Total Sales on Account 990000 1515000 765000 3270000 In the Month(20%) 198000 303000 153000 654000 In the Following Sales Month(70%) 430500 693000 1060500 2184000 In the Following Sales 2 Month(10%) 40500 61500 99000 201000 Total Collections 669000 1057500 1312500 3039000 1C Purchase Budget in Units & Value: Particulars April May June Total Sales in Units 66000 101000 51000 218000 Add: Desired Closing Inventory 40400 20400 12400 12400 Total Demand 106400 121400 63400 230400 Less: Opening Inventory 26400 40400 20400 26400 Purchase Budget in Units 80000 81000 43000 204000 Purchase Budget in Value 360000 364500 193500 918000 (Purchase Units*4.50) 1D Cash Disbursement for Purchase Budget: Particulars April May June Total Purchase Budget in Value 360000 364500 193500 918000 In the Month(50%) 180000 182250 96750 459000 In the Following Month(50%) 105000 180000 182250 467250 Total Cash Disbursement for Purchases 285000 362250 279000 926250 2 Cash Budget: Particulars April May June Total Opening Cash Balance 79000 55150 272800 79000 Add: Cash Collections 669000 1057500 1312500 3039000 Total Avaiable Cash 748000 1112650 1585300 3118000 Less: Cash Disbursement For Purchases 285000 362250 279000 926250 SalesCommission(4% of Sales) 39600 60600 30600 130800 Fixed Expenses Exl Dep 398500 398500 398500 1195500 Depreciation Excluded; Insurance Excluded Equipment 18500 45000 63500 Dividend 18750 18750 Total Cash Disbursement 741850 839850 753100 2334800 Excess/(Deficit) Cash 6150 272800 832200 783200 Add: Borrowings 49000 49000 Less: Repayments 49000 49000 Less: Interest 1470 1470 (49000*1%*3 Months) Closing Cash Balance 55150 272800 781730 781730
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