You have just been hired as a new management trainee by Earrings Unlimited, a di

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-$13 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) February (actual) March (actual) April (budget) May (budget) 21,400 June (budget) 27,400 July (budget) 41,400 August (budget) 66,400 September (budget) 26,400 51,400 31,400 29,400 101,400 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 $4.70 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:

Explanation / Answer

Cash budget will have all the excpenses except insurance which will be paid in November and depreciation which is not a cash expense.

Cash receipts are as per the company's collection plan.

April beginning cash balance is as per the balance sheet dated March 31.

(a) Sales Budget April May June Total Budgeted Sales - units 66400 101400 51400 219200 Selling Price per unit 13 13 13 13 Budgeted Sales 863200 1318200 668200 2849600 (b)   Schedule of cash receipts April May June Total Credit Sales    February sales 35620 35620    March Sales 376740 53820 430560    April Sales 172640 604240 86320 863200    May Sales 263640 922740 1186380    June Sales 133640 133640    Total Collections 585000 921700 1142700 2649400 Receivables 744380 1140880 666380 666380 (c) Inventory Purchase Budget April May June Total Budgeted sales units 66400 101400 51400 219200 Add: Desired ending inventory 40560 20560 12560 12560        (40% of next month's cost) Total goods neded 106960 121960 63960 231760 Less: Beginning inventory 26560 40560 20560 26560 Budgeted purchase units 80400 81400 43400 205200 Cost per unit of inventory ($) 4.7 4.7 4.7 4.7 Total cost of purchases 377880 382580 203980 964440 (d) Cash payment budget for purchases April May June Total Budgeted Purchases 377880 382580 203980 964440 Payments:     March purchases 107000 107000     April purchases 188940 188940 377880     May purchases 191290 191290 382580     June purchases 101990 101990     Total payments 295940 380230 293280 969450 Accounts Payable 188940 191290 101990 101990 (e) Operating expenses budget April May June Total Sales commission(4% of sales) 34528 52728 26728 113984 Advertising expense 270000 270000 270000 810000 Rent expense 25000 25000 25000 75000 Salaries expense 120000 120000 120000 360000 Utilities expense 10500 10500 10500 31500 Insurance expense 3700 3700 3700 11100 Depreciation expense 21000 21000 21000 63000 Total operating expense 484728 502928 476928 1464584 Schedule of cash payments for operating expenses April May June Total Sales commission(4% of sales) 34528 52728 26728 113984 Advertising expense 270000 270000 270000 810000 Rent expense 25000 25000 25000 75000 Salaries expense 120000 120000 120000 360000 Utilities expense 10500 10500 10500 31500 Cash payment for operating expense 460028 478228 452228 1390484 EARRINGS UNLIMITED Cash Budget April May June Total Beginning Balance 81000 55782 58524 81000 Add: Cash receipts 585000 921700 1142700 2649400 Cash available for disbursements 666000 977482 1201224 2730400 Less: Payments        for purchase of inventory 295940 380230 293280 969450        For operating expenses 460028 478228 452228 1390484        for purchase of equipment 19500 47000 66500        For dividend 20250 20250        for interest 0       Total payments 776218 877958 792508 2446684 Receipts minus payments -110218 99524 408716 283716 Minimum cash balance 57000 57000 57000 57000 Excess / (Shortage) -167218 42524 351716 226716 Financing activitiy Borrowing / (Repayments) 166000 -41000 -125000 0 Interest -4570 -4570 Total Financing 166000 -41000 -129570 -4570 Ending cash balance 55782 58524 279146 279146 EARRINGS UNLIMITED Contribution margin income statement For the quarter ending June 30 Sales Revenue 2849600 Variable expenses:      Cost of goods sold 1030240      Sales commission 113984 Total variable expenses 1144224 Contribution margin 1705376 Fixed expenses:     Advertising expense 810000    Rent expense 75000    Salaries expense 360000    Utilities expense 31500    Insurance expense 11100    Depreciation expense 63000    total operating expenses 1350600 Net operating income 354776 Interest expense 4570 Net income 350206 EARRINGS UNLIMITED Budgeted Balance sheet as at June 30 Assets Cash 279146 Accounts Receivable 666380 Inventory 59032 Prepaid insurance 13400 Property and equipment , net Beginning balance, net 1020000 Add: Purchases 66500 1086500 Less: Depreciation 63000 1023500 Total Assets 2041458 Liabilities and owners' equity Accounts Payable 101990 Dividend Payable 20250 Total liabilities 122240 Capital stock 940000 Retained earnings Balance as at April 1 649262 Net income 350206 999468 Dividends 20250 979218 Total Liabilities and equity 2041458

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