You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2547934 • 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—$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):
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 $4.60 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:
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $19,000 in new equipment during May and $46,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $19,500 each quarter, payable in the first month of the following quarter.
The company’s balance sheet as of March 31 is given below:
The company maintains a minimum cash balance of $56,000. 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 $56,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. 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 $56,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.
January (actual) 21,200 June (budget) 51,200 February (actual) 27,200 July (budget) 31,200 March (actual) 41,200 August (budget) 29,200 April (budget) 66,200 September (budget) 26,200 May (budget) 101,200Explanation / Answer
Per Chegg guidelines, 4 sub-parts have been answered.
1a. Earrings Unlimited Sales Budget April May June Quarter Budgeted sales units 66200 101200 51200 218600 Selling price per unit $ 16 16 16 16 Total sales $ 1059200 1619200 819200 3497600 1b. Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter Accounts receivable - February sales 43520 43520 Accounts receivable - March sales 461440 65920 527360 April sales 211840 741440 105920 1059200 May sales 323840 1133440 1457280 June sales 163840 163840 Total cash collections $ 716800 1131200 1403200 3251200 1c. Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted unit sales 66200 101200 51200 218600 Add: Desired ending merchandise inventory 40480 20480 12480 12480 Total needs 106680 121680 63680 231080 Less: Beginning merchandise inventory 26480 40480 20480 26480 Required purchases 80200 81200 43200 204600 Unit cost $ 4.60 4.60 4.60 4.60 Budgeted merchandise purchases $ 368920 373520 198720 941160 1d. Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable 106000 106000 April purchases 184460 184460 368920 May purchases 186760 186760 373520 June purchases 99360 99360 Total cash payments $ 290460 371220 286120 947800Related Questions
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