You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2564162 • 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—$13 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 $4.30 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 $17,500 in new equipment during May and $43,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $17,250 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 $53,000. 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 $53,000 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.
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 $53,000.
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.
January (actual) 20,600 June (budget) 50,600 February (actual) 26,600 July (budget) 30,600 March (actual) 40,600 August (budget) 28,600 April (budget) 65,600 September (budget) 25,600 May (budget) 100,600Explanation / Answer
Answer a Sales Budget April May June Total Sales in Units 65,600 100,600 50,600 216,800 Sp Per Unit 13 13 13 13 Total Sales in $ 852,800 1,307,800 657,800 2,818,400 Answer b Schedule of Expected Cash Collections from Sales April May June Total Collection from Accounts Receivables Feb Sales 34,580 34,580 March Sales 369,460 52,780 - 422,240 April Sales 170,560 596,960 85,280 852,800 May Sales 261,560 915,460 1,177,020 June Sales Sales 131,560 131,560 Total cash Collections 574,600 911,300 1,132,300 2,618,200 Answer c Merchandise Purchase Budget April May June Total Sales In units 65,600 100,600 50,600 216,800 Add: Closing Inventory in units 40,240 20,240 12,240 72,720 Total Needs 105,840 120,840 62,840 289,520 Less: opening Inventory in uints (26,240) (40,240) (20,240) (86,720) Required Purchases in Units 79,600 80,600 42,600 202,800 Price per paid of Earings 4.30 4.30 4.30 4.30 Total Purchases in $ 342,280 346,580 183,180 872,040 Answer d Schedule of Cash payments to Suppliers April May June Total Cash Payment Accounts Payable - March 103,000 103,000 April Purchases 171,140 171,140 342,280 May Purchases 173,290 173,290 346,580 June Purchases 91,590 91,590 Total Cash Payment to Suppliers 274,140 344,430 264,880 883,450 Answer e Selling & Admn. Budget April May June Total Sales Comm. - 4% 34,112 52,312 26,312 112,736 Fixed Advt. 230,000 230,000 230,000 690,000 Rent (Fixed) 21,000 21,000 21,000 63,000 Salary Expense 112,000 112,000 112,000 336,000 Utilities 8,500 8,500 8,500 25,500 Insurance 3,300 3,300 3,300 9,900 Dep. 17,000 17,000 17,000 51,000 Total 425,912 444,112 418,112 1,288,136 Schedule of Cash payments of Selling & Admn. Budget April May June Total Sales Comm. - 4% 34,112 52,312 26,312 112,736 Fixed Advt. 230,000 230,000 230,000 690,000 Rent (Fixed) 21,000 21,000 21,000 63,000 Salary Expense 112,000 112,000 112,000 336,000 Utilities 8,500 8,500 8,500 25,500 Total 405,612 423,812 397,812 1,227,236 Cash budget April May June Total Opening cash Balance 77,000 53,598 179,156 77,000 Add: receipts Collection from Customers 574,600 911,300 1,132,300 2,618,200 Total Cash available 651,600 964,898 1,311,456 2,695,200 Less: Disbursements Cash Disbursement - Accounts Payable 274,140 344,430 264,880 883,450 Selling & Admn. Exp. 405,612 423,812 397,812 1,227,236 Purchase of Equipment - 17,500 43,000 60,500 Dividend Paid 17,250 - - 17,250 Total Disbursement 697,002 785,742 705,692 2,188,436 Cash Balance Closing (45,402) 179,156 605,764 506,764 Add: Finance from Bank 99,000 - 99,000 Less: Payment to Bank - (99,000) (99,000) Less: Payment of interet - Bank loan - - (2,970) (2,970) Net Cash Balance Closing 53,598 179,156 503,794 503,794 Income Statement For the Qtr Ending June 30 Sales 2,818,400 Less: Variable Cost Cost of Goods Sold 932,240 Sales Comm. - 4 % of Sales 112,736 1,044,976 Contribution 1,773,424 Less: Fixed Cost Advt. 690,000 Rent (Fixed) 63,000 Salary Expense 336,000 Utilities 25,500 Insurance 9,900 Dep. 51,000 1,175,400 Operating Profit 598,024 Less: Interest Expenses 2,970 Net Income 595,054 Balance Sheet As on June 30 Assets Current Assets Cash 503,794 Accounts receivables 657,020 Prepaid Insurance 12,600 Inventory 52,632 1,226,046 Fixed Assets Property & Equipment 1,040,500 Less: Dep. (51,000) 989,500 Total Assets 2,215,546 Liabilities Accounts Payable 91,590 Dividends Payable 17,250 Total liabilities 108,840 Shareholders's Equity Common Stock 860,000 Retained Earnings 1,246,706 Total Stockholders equity 2,106,706 Total liabilities & Stockholders' Equity 2,215,546 - Schedule of Retained Earnings As on June 30 Opening Balance 668,902 Add: net income 595,054 Less: Dividend declared (17,250) Closing Balance 1,246,706
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