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—$10 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 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:

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 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:

The company maintains a minimum cash balance of $50,000. 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 $50,000 in cash.

Required:

1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

a. A sales budget, by month and in total.

January (actual) 20,000 June (budget) 50,000 February (actual) 26,000 July (budget) 30,000 March (actual) 40,000 August (budget) 28,000 April (budget) 65,000 September (budget) 25,000 May (budget) 100,000 a. A sales budget, by month and in total. Sales Budget April May June Quarter Budgeted unit sales Selling price per unit Total sales b. A schedule of expected cash collections from sales, by month and in total. Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February sales March sales April sales May sales June sales Total cash collections

Explanation / Answer

2.

Interest = ($170000 x 1% x 3) + ($10000 x 1% x 2) = $5100 + $200 = $5300

1a. Earrings Unlimited Sales Budget April May June Quarter Budgeted sales units 65000 100000 50000 215000 Selling price per unit $ 10 10 10 10 Total sales $ 650000 1000000 500000 2150000 1b. Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February sales 26000 26000 March sales 280000 40000 320000 April sales 130000 455000 65000 650000 May sales 200000 700000 900000 June sales 100000 100000 Total cash collections $ 436000 695000 865000 1996000 1c. Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted unit sales 65000 100000 50000 215000 Add: Desired ending merchandise inventory 40000 20000 12000 12000 Total needs 105000 120000 62000 227000 Less: Beginning merchandise inventory 26000 40000 20000 26000 Required purchases 79000 80000 42000 201000 Unit cost $ 4.00 4.00 4.00 4.00 Required dollar purchases $ 316000 320000 168000 804000 1d. Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable 100000 100000 April purchases 158000 158000 316000 May purchases 160000 160000 320000 June purchases 84000 84000 Total cash payments $ 258000 318000 244000 820000

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