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 $16 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) 22,400 June (budget) 28,400 July (budget) 42,400 August (budget) 67,400 September (budget) 52,400 32,400 30,400 27,400 102,400 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 $5.2 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: 4% of sales Fixed: S 320,000 S 30,000 $130,000 S 13,000 $ 4,200 S 26,000 Rent Salaries Utilities Depreciation

Explanation / Answer

ans Sales Budget April May June Total February March July August Sales in units A 67400 102400 52400 222200 28400 42400 32400 30400 Sale Price 16 16 16 16 16 16 16 16 Total sales 1078400 1638400 838400 3555200 454400 678400 518400 486400 Schedule of Cash collection Feb sales 45440 45440 Marc sales (70%,10% of $518400) 474880 67840 542720 April sales (20%,70%,10%) 215680 754880 107840 1078400 May Sales 327680 1146880 1474560 June sales 167680 167680 Total A 736000 1150400 1422400 3308800 Accounts Receivable May 1638400*.1+June 838400*.8= 834560 Purcahse Budget April May June Total July Units to be sold 67400 102400 52400 222200 32400 Closing Inventory 40% of next month sales S*.4 40960 20960 12960 12960 Total needs 108360 123360 65360 235160 Less: Beginning Inventory 26960 40960 20960 26960 Units to be produced 81400 82400 44400 208200 Unit cost 5.2 5.2 5.2 5.2 Required dollar purchases A 423280 428480 230880 1082640 COGS= Units sold*4 350480 532480 272480 1155440 Cash Disbursement Schedule From march purchases 112000 112000 From April Purchases 211640 211640 423280 From May Purchases 214240 214240 428480 From June purchases 115440 115440 Total B 323640 425880 329680 1079200 Accounts payable as on 30 June 115440 working Cash payments payment of Inventory 323640 425880 329680 1079200 Sales Commissions @ 4% 43136 65536 33536 142208 Advertising 320000 320000 320000 960000 Rent 30000 30000 30000 90000 Salaries 130000 130000 130000 390000 Utilities 13000 13000 13000 39000 Dividend Paid 24000 24000 Equipment purchased 22000 52000 74000 April May J June Total Beginning Cash balance 86000 $26,224 $170,208 86000 Cash receipt 736000 1150400 1422400 3308800 Total cash available 822000 1176624 1592608 3394800 Less: Cash Disbursements payment of Inventory 323640 425880 329680 1079200 Sales Commissions @ 4% 43136 65536 33536 142208 Advertising 320000 320000 320000 960000 Rent 30000 30000 30000 90000 Salaries 130000 130000 130000 390000 Utilities 13000 13000 13000 39000 Dividend Paid 24000 0 0 24000 Equipment purchased 0 22000 52000 74000 Total cash Disbursements $883,776 ######## $908,216 $2,798,408 Excess /(deficiency) of cash receipts over cash disbursements ($61,776) $170,208 $684,392 $596,392 Minimum Cash balance (working) 62000 62000 62000 62000 Financing Borrowed 88000 $88,000 Repaid -88000 ($88,000) Interest Repaid -2640 ($2,640) Total financing 88000 0 -90640 -2640 Cash Balance ($35,776) $108,208 $531,752 $88,000 Ending Cash balance $26,224 $170,208 $593,752 $593,752 Interest=88000*3%=2640 Dear student the month wise income staement is for your understanding Income Statement as on 3o June 2016 April May June Total Sales 1078400 1638400 838400 3555200 3555200 Less: variable Cost Cost of Good Sold 350480 532480 272480 1155440 Sales Commissions @ 4% 43136 65536 33536 142208 Contribution 684784 1040384 532384 2257552 Fixed Expenses Advertising 320000 320000 320000 960000 Salaries 30000 30000 30000 90000 Utilities 130000 130000 130000 390000 Rent 13000 13000 13000 39000 Insurance 4300 4300 4300 12900 Depreciation 26000 26000 26000 78000 total fixed expenses 523300 523300 523300 1569900 Operating Income 161484 517084 9084 687652 Interest On Short Term Loan 880 880 880 2640 Net Income 160604 516204 8204 685012 ans 3 Income statement For the three months period Sales 3555200 Less: variable Cost Cost of Good Sold 1155440 Sales Commissions @ 4% 142208 Total variable expenses 1297648 Contribution 2257552 Fixed Expenses Advertising 960000 Salaries 90000 Utilities 390000 Rent 39000 Insurance 12900 Depreciation 78000 total fixed expenses 1569900 Operating Income 687652 Interest On Short Term Loan -2640 Net Income 685012 Net Income Statement of Retained earnings Opening balance 735352 Add: Net Income for the year 685012 Less: Dividend payable -24000 Balance June 30 1396364 BalANCE Sheet as on 30 June Assets Cash 593752 Accounts Receivable 834560 Inventory 67392 Prepaid Insurance=(27000-12600) 14100 Property & Equipment 1144000 Less: Accumulated Depreciation -78000 2575804 Liabilities & Stockholder equity Accounts payable 115440 Dividend Payable 24000 Total Laibilities 139440 Stockholder Equity Common Stock 1040000 Retained earnings 1396364 Total Stockholder Equity 2436364 TotalLiabilities & Stockholder Equity 2575804

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