You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2549042 • 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—$19 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 $6.00 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 $26,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $30,000 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 $70,000. 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 $70,000 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.
January (actual) 24,000 June (budget) 54,000 February (actual) 30,000 July (budget) 34,000 March (actual) 44,000 August (budget) 32,000 April (budget) 69,000 September (budget) 29,000 May (budget) 104,000Explanation / Answer
4,313,000
b. A schedule of expected cash collections, by month and in total. :
Feb Sales = (30,000*19= 570,000)*10%=57,000
a. A sales budget, by month and in total: SALES BUDGET: April May June Quarter Budgeted unit sales 69,000 104,000 54,000 227,000 Selling price per unit 19 19 19 19 Total Sale 1,311,000 1,976,000 1,026,0004,313,000
b. A schedule of expected cash collections, by month and in total. :
SCHEDULE OF EXPECTED CASH COLLECTIONS: April May June Quarter Sales 20% 262,200 395,200 205,200 862,600 Sales 70% 585,200 917,700 1,383,200 2,886,100 Sales 10% 57,000 83,600 131,100 271,700 Total Cash Collection 904,400 1,396,500 1,719,500 4,020,400 Workings: March sales = (44,000*19 = 836000) *70% = 585,200 April sales = 1,311,000*70% = 917700 May Sales = 1,976,000*70%= 1,383,200 April sales = 1,311,000*10% = 131,100 March sales = (44,000*19 = 836000) *10% = 83,600Feb Sales = (30,000*19= 570,000)*10%=57,000
MERCHANDISE PURCHASE BUDGET April May June Quarter UNIT SALES 69,000 104,000 54,000 227,000 add desired ending inventory 40% 41,600 21,600 13,600 13,600 Total Needs 110,600 125,600 67,600 240,600 Less beginning Inventory 27,600 41,600 21,600 27,600 Required Purchases 83,000 84,000 46,000 213,000 Cost of Purchase @ 4 per unit 332,000 336,000 184,000 852,000Related Questions
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