You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2548962 • 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
Februrary (actual) 26,200
March (actual) 40,200
April (budget) 65,200
May (budget) 100,200
June (budget) 50,200
July (budget) 30,200
August (budget) 28,200
September (budget) 25,200
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
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 $51,000
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
Explanation / Answer
Answer a Sales Budget April May June Total Sales in Units 65,200 100,200 50,200 215,600 Sp Per Unit 11 11 11 11 Total Sales in $ 717,200 1,102,200 552,200 2,371,600 Answer b Schedule of Expected Cash Collections from Sales April May June Total Collection from Accounts Receivables Feb Sales 28,820 28,820 March Sales 309,540 44,220 - 353,760 April Sales 143,440 502,040 71,720 717,200 May Sales 220,440 771,540 991,980 June Sales Sales 110,440 110,440 Total cash Collections 481,800 766,700 953,700 2,202,200 Answer c Merchandise Purchase Budget April May June Total Sales In units 65,200 100,200 50,200 215,600 Add: Closing Inventory in units 40,080 20,080 12,080 12,080 Total Needs 105,280 120,280 62,280 227,680 Less: opening Inventory in units (26,080) (40,080) (20,080) 26,080 Required Purchases in Units 79,200 80,200 42,200 253,760 Price per paid of Earings 4.10 4.10 4.10 4.10 Total Purchases in $ 324,720 328,820 173,020 826,560 Answer d Schedule of Cash payments to Suppliers April May June Total Cash Payment Accounts Payable - March 101,000 101,000 April Purchases 162,360 162,360 324,720 May Purchases 164,410 164,410 328,820 June Purchases 86,510 86,510 Total Cash Payment to Suppliers 263,360 326,770 250,920 841,050 Answer e Selling & Admn. Budget April May June Total Sales Comm. - 4% 28,688 44,088 22,088 94,864 Fixed Advt. 210,000 210,000 210,000 630,000 Rent (Fixed) 19,000 19,000 19,000 57,000 Salary Expense 108,000 108,000 108,000 324,000 Utilities 7,500 7,500 7,500 22,500 Insurance 3,100 3,100 3,100 9,300 Dep. 15,000 15,000 15,000 45,000 Total 391,288 406,688 384,688 1,182,664 Schedule of Cash payments of Selling & Admn. Budget April May June Total Sales Comm. - 4% 28,688 44,088 22,088 94,864 Fixed Advt. 210,000 210,000 210,000 630,000 Rent (Fixed) 19,000 19,000 19,000 57,000 Salary Expense 108,000 108,000 108,000 324,000 Utilities 7,500 7,500 7,500 22,500 Total 373,188 388,588 366,588 1,128,364 Cash budget April May June Total Opening cash Balance 75,000 51,502 86,344 75,000 Add: receipts Collection from Customers 481,800 766,700 953,700 2,202,200 Total Cash available 556,800 818,202 1,040,044 2,277,200 Less: Disbursements Cash Disbursement - Accounts Payable 263,360 326,770 250,920 841,050 Selling & Admn. Exp. 373,188 388,588 366,588 1,128,364 Purchase of Equipment - 16,500 41,000 57,500 Dividend Paid 15,750 - - 15,750 Total Disbursement 652,298 731,858 658,508 2,042,664 Cash Balance Closing (95,498) 86,344 381,536 234,536 Add: Finance from Bank 147,000 - 147,000 Less: Payment to Bank - (147,000) (147,000) Less: Payment of interet - Bank loan - (4,410) (4,410) Net Cash Balance Closing 51,502 86,344 230,126 230,126 Income Statement For the Qtr Ending June 30 Sales 2,371,600 Less: Variable Cost Cost of Goods Sold 883,960 Sales Comm. - 4 % of Sales 94,864 978,824 Contribution 1,392,776 Less: Fixed Cost Advt. 630,000 Rent (Fixed) 57,000 Salary Expense 324,000 Utilities 22,500 Insurance 9,300 Dep. 45,000 1,087,800 Operating Profit 304,976 Less: Interest Expenses 4,410 Net Income 300,566 Balance Sheet As on June 30 Assets Current Assets Cash 230,126 Accounts receivables 551,980 Prepaid Insurance 12,200 Inventory 49,528 843,834 Fixed Assets Property & Equipment 1,017,500 Less: Dep. (45,000) 972,500 Total Assets 1,816,334 Liabilities Accounts Payable 86,510 Dividends Payable 15,750 Total liabilities 102,260 Shareholders's Equity Common Stock 820,000 Retained Earnings 894,074 Total Stockholders equity 1,714,074 Total liabilities & Stockholders' Equity 1,816,334 - Schedule of Retained Earnings As on June 30 Opening Balance 609,258 Add: net income 300,566 Less: Dividend declared (15,750) Closing Balance 894,074
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.