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 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-$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) February (actual) March (actual) April (budget) May (budget) 21,600 June (budget) 27,600 July (budget) 41,600 August (budget) 66,600 101,600 51,600 31,600 29,600 26,600 September (budget) 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 $4.8 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 Monthly operating expenses for the company are given below: Variable Sales commissions 4% of sales Fixed Rent Salaries Utilities $280,000 S 26,000 $ 122,000 $ 11,000 3,800 S 22,000 Depreciation

Explanation / Answer

Budgeted Income Statement Sales Revenue from Sales Budget $3,077,200 Less: Variable Cost Cost of Goods Sold ( 219800*$4.8) $1,055,040 Sales Comission (4% of Sales) $123,088 Contribution $1,899,072 Less Fixed Cost Advertising $840,000 Insurance $11,400 Rent $78,000 Depreciation ( $22000X3) $66,000 Salaries $366,000 Utilities $33,000 Net Income $504,672 Budgeted Balance Sheet Asset Cash $423,312 Account Recievable (May Sale: $142240+ June :$577920) $720,160 Inventory (12640X $4.80) $60,672 Prepaid Insurance ($25000-(3800*3) $13,600 Property & Equipment ( Net) (1030000+68000-(22000X3) $1,032,000 Total Asset $2,249,744 Liability and Shareholder's Equity Account Payable $104,640 Dividend Payable $21,000 Common Stock $960,000 Retained Earning (680432-21000+504672) $1,164,104 Total Liabilities and Stockholder Equity $2,249,744

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