You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2534326 • 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—$18 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)
22,800
June (budget)
52,800
February (actual)
28,800
July (budget)
32,800
March (actual)
42,800
August (budget)
30,800
April (budget)
67,800
September (budget)
27,800
May (budget)
102,800
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 $5.4 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:
Advertising
$
340,000
Rent
$
32,000
Salaries
$
134,000
Utilities
$
14,000
Insurance
$
4,400
Depreciation
$
28,000
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $23,000 in new equipment during May and $54,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $25,500 each quarter, payable in the first month of the following quarter.
A listing of the company’s ledger accounts as of March 31 is given below:
Assets
Cash
$
88,000
Accounts receivable ($51,840 February sales;$616,320 March sales)
668,160
Inventory
146,448
Prepaid insurance
28,000
Property and equipment (net)
1,090,000
Total assets
$
2,020,608
Liabilities and Stockholders’ Equity
Accounts payable
$
114,000
Dividends payable
25,500
Common stock
1,080,000
Retained earnings
801,108
Total liabilities and stockholders’ equity
$
2,020,608
The company maintains a minimum cash balance of $64,000. 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 $64,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
A sales budget, by month and in total.
Sales Budget
April
May
June
Quarter
Budgeted unit sales
67,800
102,800
52,800
223,400
Selling price per unit
$18
$18
$18
$18
Total sales
$1,220,400
$1,850,400
$950,400
$4,021,200
A schedule of expected cash collections from sales, by month and in total.
Earrings Unlimited
Schedule of Expected Cash Collections
Earrings Unlimited
Schedule of Expected Cash Collections
Earrings Unlimited
Schedule of Expected Cash Collections
Earrings UnlimitedSchedule of Expected Cash Collections
April May June Quarter
February sales $51,840 0 0 $51,840
March sales 539,280 77,040 0 616,320
April sales 244,080 854,280 122,040 1,220,400
May sales 0 308,400 1,079,400 1,387,800
June sales 0 0 158,400 158,400
Total cash collections $835,200 $1,239,720 $1,359,840 $3,434,760
** FIGURES IN BOLD ARE INCORRECT, PLEASE HELP, ALSO Letter C.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost of purchases to 1 decimal place.)
Earrings Unlimited
Merchandise Purchases Budget
April
May
June
Quarter
Budgeted unit sales
0
Total needs
0
0
0
0
Required purchases
0
0
0
0
Unit cost
Required dollar purchases
$0
$0
$0
$0
January (actual)
22,800
June (budget)
52,800
February (actual)
28,800
July (budget)
32,800
March (actual)
42,800
August (budget)
30,800
April (budget)
67,800
September (budget)
27,800
May (budget)
102,800
Explanation / Answer
Earning Unlimited Sales Budget April May June Quarter Units 67800 102800 52800 223400 Rate PU 18 18 18 18 Sales 1220400 1850400 950400 4021200 Earning Unlimited Schedule of Expected Cash Collections April May June Quarter February Sales 51840 51840 In the Month 20% March Sales 539280 77040 0 616320 In the First Month 70% April Sales 244080 854280 122040 1220400 In the Second Month 10% May Sales 370080 1295280 1665360 100% June Sales 190080 190080 Total 835200 1301400 1607400 3744000 Sales for the Month: Feb Mar Apr May Jun Units 28800 42800 67800 102800 52800 Rate PU 18 18 18 18 18 Earning Unlimited Sales 518400 770400 1220400 1850400 950400 Merchandise Purchase Budget April May June Quarter Budgeted Sales Units 67800 102800 52800 223400 Add: Closing Inventory 41120 21120 13120 13120 (40% of Next Month Sales) Total Needs 108920 123920 65920 236520 Less: Opening Units 27120 41120 21120 27120 Required Purchases 81800 82800 44800 209400 Unit Cost 5.40 5.40 5.40 5.40 Required Dollar Purchases 441720 447120 241920 1130760
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.