You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2528150 • 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. Determine any borrowing that would be needed to maintain the minimum cash balance of $66,000 (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
Per Chegg guidelines, 4 sub-parts have been answered.
1a. Earrings Unlimited Sales Budget April May June Quarter Budgeted sales units 68200 103200 53200 224600 Selling price per unit $ 20 20 20 20 Total sales $ 1364000 2064000 1064000 4492000 1b. Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February sales 58400 58400 March sales 604800 86400 691200 April sales 272800 954800 136400 1364000 May sales 412800 1444800 1857600 June sales 212800 212800 Total cash collections $ 936000 1454000 1794000 4184000 1c. Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted unit sales 68200 103200 53200 224600 Add: Desired ending merchandise inventory 41280 21280 13280 13280 Total needs 109480 124480 66480 237880 Less: Beginning merchandise inventory 27280 41280 21280 27280 Required purchases 82200 83200 45200 210600 Unit cost $ 5.60 5.60 5.60 5.60 Required dollar purchases $ 460320 465920 253120 1179360 1d. Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable 116000 116000 April purchases 230160 230160 460320 May purchases 232960 232960 465920 June purchases 126560 126560 Total cash payments $ 346160 463120 359520 1168800Related Questions
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