Help with the statement income please? You have just been hired as a new managem

Question

Help with the statement income please?

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outiets 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 comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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-$15 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): 22,200 June (budget) 28,200 July (budget) 42,200 August (budget) 67,200 September (budget) 52,200 January (actual) February (actual) March (actual) April (budget) May (budget) 30,200 27,200 102,200 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 $5.1 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, with no discount, and payable within 15 days. The company has found, however, that 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: 4% of sales Sales commissions Fixed Rent Salaries Utilities Insurance Depreciation S 310,000 S 29,000 $128,000 $ 12,500 $ 4,100 S 25,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $21,500 in new equipment during May and $51,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $23,250 each quarter payable in the first month of the following quarter A listing of the company's ledger accounts as of March 31 is given below: A listing of the company's ledger accounts as of March 31 is given below: Assets Cash Accounts receivable ($42,300 February sales; $506,400 March sales) S 85,000 548,700 137,088 26,500 1,060,000 Prepaid insurance Property and equipment (net) Total assets s 1,857,288 Liabilities and Stockholders' Equity Accounts payable Dividends payable Common stock Retained earnings S 111.000 23,250 1,020,000 703,038 Total liabilities and stockholders' equity s 1,857,288 The company maintains a minimum cash balance of S61,000. 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 $61,000 in cash

Explanation / Answer

Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 Sales 3324000 Variable expenses: Beginning merchandise inventory 26880 Add Merchandise purchases 277712 Cost of goods available for sale 304592 Less Ending merchandise inventory 12880 Cost of goods sold 291712 Sales commissions 132960 Total variable expenses 424672 Contribution margin 2899328 Fixed expenses: Advertising 930000 Rent 87000 Salaries 384000 Utilities 37500 Insurance ($4100 x 3) 12300 Depreciation ($25000 x 3) 75000 Total fixed expenses 1525800 Net operating income $ 1373528 Interest expense 4530 Net income $ 1368998

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