You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2546734 • 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 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—$11 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)
20,200
June (budget)
50,200
February (actual)
26,200
July (budget)
30,200
March (actual)
40,200
August (budget)
28,200
April (budget)
65,200
September (budget)
25,200
May (budget)
100,200
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 $4.10 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:
Variable:
Sales commissions
4
% of sales
Fixed:
Advertising
$
210,000
Rent
$
19,000
Salaries
$
108,000
Utilities
$
7,500
Insurance
$
3,100
Depreciation
$
15,000
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $16,500 in new equipment during May and $41,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,750 each quarter, payable in the first month of the following quarter.
The company’s balance sheet as of March 31 is given below:
Assets
Cash
$
75,000
Accounts receivable ($28,820 February sales; $353,760 March sales)
382,580
Inventory
106,928
Prepaid insurance
21,500
Property and equipment (net)
960,000
Total assets
$
1,546,008
Liabilities and Stockholders’ Equity
Accounts payable
$
101,000
Dividends payable
15,750
Common stock
820,000
Retained earnings
609,258
Total liabilities and stockholders’ equity
$
1,546,008
The company maintains a minimum cash balance of $51,000. 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 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 while still retaining at least $51,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
Budget assumptions for the year.
A sales budget, by month and in total.
A schedule of expected cash collections, by month and in total.
A merchandise purchases budget in units and in dollars. Show the budget by month and in
total.
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 $51,000.
A budgeted income statement for the three-month period ending June 30. Use the contributionapproach.
A budgeted balance sheet as of June 30.
January (actual)
20,200
June (budget)
50,200
February (actual)
26,200
July (budget)
30,200
March (actual)
40,200
August (budget)
28,200
April (budget)
65,200
September (budget)
25,200
May (budget)
100,200
Explanation / Answer
Per Chegg guidelines, 4 sub-parts have been answered.
Earrings Unlimited Sales Budget April May June Quarter Budgeted sales units 65200 100200 50200 215600 Selling price per unit $ 11 11 11 11 Total sales $ 717200 1102200 552200 2371600 Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter Accounts receivable - February sales 28820 28820 Accounts receivable - March sales 309540 44220 353760 April sales 143440 502040 71720 717200 May sales 220440 771540 991980 June sales 110440 110440 Total cash collections $ 481800 766700 953700 2202200 Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted unit sales 65200 100200 50200 215600 Add: Desired ending merchandise inventory 40080 20080 12080 12080 Total needs 105280 120280 62280 227680 Less: Beginning merchandise inventory 26080 40080 20080 26080 Required purchases 79200 80200 42200 201600 Unit cost $ 4.10 4.10 4.10 4.10 Required dollar purchases $ 324720 328820 173020 826560 Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable 101000 101000 April purchases 162360 162360 324720 May purchases 164410 164410 328820 June purchases 86510 86510 Total cash payments $ 263360 326770 250920 841050Related Questions
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