You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2551129 • 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
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:
Budget assumptions for the year.
A sales budget, by month and in total.
A schedule of expected cash collections, by month and in total.
A merchandise purchases budget in units and in dollars. Show the budget by month and in
total.
A schedule of expected cash disbursements for merchandise purchases, by month and in total.
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.
A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
A budgeted balance sheet as of June 30.
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
Explanation / Answer
Sales Budget Particulars January February March April May June July August September Total Sales (Pairs) 20200 26200 40200 65200 100200 50200 30200 28200 25200 385800 × Price Per Pair 11 11 11 11 11 11 11 11 11 11 Sales Value $ 222200 288200 442200 717200 1102200 552200 332200 310200 277200 4243800 Schedule of expected Cash Collections Particulars January February March April May June July August September Total Sales Value 222200 288200 442200 717200 1102200 552200 332200 310200 277200 4243800 A Collected in month of Sales (20% of sales) 44440 57640 88440 143440 220440 110440 66440 62040 55440 848760 B Addition 70% collection - 155540 201740 309540 502040 771540 386540 232540 217140 2776620 C Remaining 10% collection - - 22220 28820 44220 71720 110220 55220 33220 365640 D Total (A+B+C) $ 44440 213180 312400 481800 766700 953700 563200 349800 305800 3991020 Merchandise Purchase Budget Particulars January February March April May June July August September Total Sales (Units ) 20200 26200 40200 65200 100200 50200 30200 28200 25200 385800 Closing Stock (Units) 10480 16080 26080 40080 20080 12080 11280 10080 154320 300560 Opening Stock (units) 0 10480 16080 26080 40080 20080 12080 11280 10080 146240 0 Purchase (Units) 30680 31800 50200 79200 80200 42200 29400 27000 169440 540120 Purchase price per earrings/units 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 Total Purchase Value ($) 125788 130380 205820 324720 328820 173020 120540 110700 694704 2214492 A schedule of expected cash disbursements for merchandise purchases Particulars January February March April May June July August September Total Total Purchase Value ($) 125788 130380 205820 324720 328820 173020 120540 110700 694704 2214492 Cash Disbursements 50% same month 62894 65190 102910 162360 164410 86510 60270 55350 347352 1107246 50% next month 0 62894 65190 102910 162360 164410 86510 60270 55350 759894 Total in $ 62894 128084 168100 265270 326770 250920 146780 115620 402702 1867140 Cash Budget ($) Particulars April May June July August September Total Opening Cash Balance 75000 51000 51000 51000 51000 51000 330000 + Cash Collections (sales) 481800 766700 953700 563200 349800 305800 3421000 - Cash Disbursements (Purch.) 265270 326770 250920 146780 115620 402702 1508062 - New equipment 0 16500 41000 0 0 0 57500 - Dividend 15750 0 0 15750 0 0 31500 - Sales commission @ 4% on sales 28688 44088 22088 13288 12408 11088 131648 - Advertizing 210000 210000 210000 210000 210000 210000 1260000 - Salaries 19000 19000 19000 19000 19000 19000 114000 - Interest @ 1 on borrowing (balance) 0 1484 1151 0 0 217 2852 - Rent 108000 108000 108000 108000 108000 108000 648000 - Utilities 7500 7500 7500 7500 7500 7500 45000 -97408 84358 345041 93882 -71728 -401707 -47562 Closing Balance 51000 51000 51000 51000 51000 51000 306000 Borrowing 148408 0 0 21728 452707 622843 Repayment 0 33358 115050 0 0 0 148408 Balance of borrowing 148408 115050 0 0 21728 474435 759621 Budgeted Income Statement ($) Particulars April May June Sales 717200 1102200 552200 Variable Exp. COST of Purchase 324720 328820 173020 Variable selling exp. @ 4% 28688 44088 22088 Interest on borrowing 0 1484 1151 Contribution (A) 363792 727808 355941 Fixed EXP. Advertizing 210000 210000 210000 Salaries 19000 19000 19000 Rent 108000 108000 108000 Utilities 7500 7500 7500 Depreciation 15000 15000 15000 TOTAL FIXED EXP. (B) 359500 359500 359500 NET (A-B) 4292 368308 -3559 BUDGETED BALANCE SHEET AS OF 30 JUNE CASH 51000 ACCOUNT RECEIVABLE 541200 INVENTORY (98320×4.1) 403112 PREPAID INSURANCE 21500 PROPERTY & EQUIPMENT (NET) 972500 {960000+16500+41000-(15000×3)} ACCOUNTS PAYABLE 187510 DIVIDEND PAYABLE 47250 COMMON STOCK 820000 RETAINED EARNINGS 978299 (609258+4292+368308-3559)
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