You have just been hired as a new management trainee by earrings unlimited, a di
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You have just been hired as a new management trainee by earrings unlimited, a distributor of ... Your question has been answered Let us know if you got a helpful answer. Rate this answer Question: You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earr... 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. T
he 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:
1. Budget assumptions for the year.
6. 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 $51,000.
7. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
8. A budgeted balance sheet as of June 30.
Explanation / Answer
(a) Sales Budget April May June Total Budgeted Sales - units 65200 100200 50200 215600 Selling Price per unit 11 11 11 11 Budgeted Sales 717200 1102200 552200 2371600 (b) Schedule of cash receipts April May June Total Credit Sales February sales 28820 28820 March Sales 309540 44220 353760 April Sales 143440 502040 71720 717200 May Sales 220440 771540 991980 June Sales 110440 110440 Total Collections 481800 766700 953700 2202200 Receivables 617980 953480 551980 551980 (c) Inventory Purchase Budget April May June Total Budgeted sales units 65200 100200 50200 215600 Add: Desired ending inventory 40080 20080 12000 12000 (40% of next month's cost) Total goods neded 105280 120280 62200 227600 Less: Beginning inventory 26080 40080 20080 26080 Budgeted purchase units 79200 80200 42120 201520 Cost per unit of inventory ($) 4.1 4.1 4.1 4.1 Total cost of purchases 324720 328820 172692 826232 (d) Cash payment budget for purchases April May June Total Budgeted Purchases 324720 328820 172692 826232 Payments: March purchases 101000 101000 April purchases 162360 162360 324720 May purchases 164410 164410 328820 June purchases 86346 86346 Total payments 263360 326770 250756 840886 Accounts Payable 162360 164410 86346 86346 (e) Operating expenses budget April May June Total Sales commission(4% of sales) 28688 44088 22088 94864 Advertising expense 210000 210000 210000 630000 Rent expense 19000 19000 19000 57000 Salaries expense 108000 108000 108000 324000 Utilities expense 7500 7500 7500 22500 Insurance expense 3100 3100 3100 9300 Depreciation expense 15000 15000 15000 45000 Total operating expense 391288 406688 384688 1182664 Scedhule of cash payments for operating expenses April May June Total Sales commission(4% of sales) 28688 44088 22088 94864 Advertising expense 210000 210000 210000 630000 Rent expense 19000 19000 19000 57000 Salaries expense 108000 108000 108000 324000 Utilities expense 7500 7500 7500 22500 Cash payment for operating expense 373188 388588 366588 1128364 EARRINGS LIMITED Cash Budget April May June Total Beginning Balance 75000 50502 50344 75000 Add: Cash receipts 481800 766700 953700 2202200 Cash available for disbursements 556800 817202 1004044 2277200 Less: Payments for purchase of inventory 263360 326770 250756 840886 For operating expenses 373188 388588 366588 1128364 for purchase of equipment 16500 41000 57500 For dividend 15750 15750 for interest 4030 4030 Total payments 652298 731858 662374 2046530 Receipts minus payments -95498 85344 341670 230670 Minimum cash balance 51000 51000 51000 51000 Excess / (Shortage) -146498 34344 290670 179670 Financing activitiy Borrowing / (Repayments) 146000 -35000 111000 Repayments -111000 -111000 Total Financing 146000 -35000 -111000 0 Ending cash balance 50502 50344 230670 230670 EARRINGS LIMITED Contribution margin income statement For the quarter ending June 30 Sales Revenue 2371600 Variable expenses: Cost of goods sold 883960 Sales commission 94864 Total variable expenses 978824 Contribution margin 1392776 Fixed expenses: Advertising expense 630000 Rent expense 57000 Salaries expense 324000 Utilities expense 22500 Insurance expense 9300 Depreciation expense 45000 total operating expenses 1087800 Net operating income 304976 Interest expense 4030 Net income 300946 EARRINGS LIMITED Budgeted Balance sheet as at June 30 Assets Cash 230670 Accounts Receivable 551980 Inventory 49200 Prepaid insurance 12200 Property and equipment , net Beginning balance, net 960000 Add: Purchases 57500 1017500 Less: Depreciation 45000 972500 Total Assets 1816550 Liabilities and owners' equity Accounts Payable 86346 Dividend Payable 15000 Total liabilities 101346 Capital stock 820000 Retained earnings Balance as at April 1 609258 Net income 300946 910204 Dividends 15000 895204 Total Liabilities and equity 1816550
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