You have just been hired as a new management trainee by Earrings Unlimited, a di

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 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 $20 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) February (actual) March (actual) April (budget) May (budget) 23,200 June (budget) 29,200 July (budget) 43,200 August (budget) 68,200 September (budget) 53,200 33,200 31,200 28,200 103,200 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 $5.6 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 $360,000 $ 34,000 $138,000 $15,000 $ 4,600 $ 30,000

Explanation / Answer

Required Budgets are as prepared below:

1a Earings unlimited Sales Budget For the quarter ended June 30 Month Particulars April May June Total Budgeted Unit sales 68,200 103,200 53,200 224,600 Sale Price 20 20 20 20 Budgeted sales 1,364,000 2,064,000 1,064,000 4,492,000 1b. Earings unlimited Schedule of expected Cash collections For the quarter ended June 30 Month Particulars April May June Total Beginning Accounts Receivable February sales (29,200*20*10%) 58,400 58,400 March sales (43,200*20*70%) 604,800 604,800 March sales (43,200*20*10%) 86,400 86,400 April Credit Sales 272,800 954,800 136,400 1,364,000 May Credit Sales 412,800 1,444,800 1,857,600 June Credit sales 212,800 212,800 Total collections 936,000 1,454,000 1,794,000 4,184,000 Account receivable for June Sale 851,200 Account receivable for May Sale 206,400 1c. Earings unlimited Merchandise Purchase Budget For the quarter ended June 30 Month Particulars April May June Total july Budgeted Unit Sales 68,200 103,200 53,200 224,600 33,200 Add: Desired Ending merchandise inventory (40% of next month sales) 41,280 21,280 13,280 13,280 Total needs 109,480 124,480 66,480 237,880 Less: beginning merchandise inventory 27,280 41,280 21,280 27,280 Required purchase 82,200 83,200 45,200 210,600 Unit Cost 5.6 5.6 5.6 5.6 Required dollar purchases $460,320 $465,920 $253,120 $1,179,360 1d. Earings unlimited Schedule of expected Cash payments For the quarter ended June 30 Month Particulars April May June Total Beginning Accounts Payable (a) $116,000 $116,000 April Purchases (b) $230,160 $230,160 $460,320 May Purchases (c ) $232,960 $232,960 $465,920 June Purchases (d) $126,560 $126,560 ####### Total payments (a+b+c+d) $346,160 $463,120 $359,520 $1,168,800 Earings unlimited Commission For the quarter ended June 30 Month Particulars April May June Total Budgeted Unit sales 68,200 103,200 53,200 224,600 Sale Price 20 20 20 20 Budgeted sales 1,364,000 2,064,000 1,064,000 4,492,000 Sales commisssions (4% of sales) 54,560 82,560 42,560 179,680 2 Earings unlimited Cash Budget For the quarter ended June 30 Month Particulars April May June Total Beginning Cash balance 90,000 66,280 403,600 90,000 Add: Collection from customers $936,000 $1,454,000 $1,794,000 $4,184,000 cash available for use $1,026,000 $1,520,280 $2,197,600 $4,274,000 Less: cash Disbursements Merchandise purchase $346,160 $463,120 $359,520 1,168,800 Advertising 360,000 360,000 360,000 1,080,000 Rent 34,000 34,000 34,000 102,000 Salaries 138,000 138,000 138,000 414,000 Commissions 54,560 82,560 42,560 179,680 Utilities 15,000 15,000 15,000 45,000 Equipment purchase 24,000 56,000 80,000 Dividend paid 27,000 27000 Total disbusrement 974,720 1,116,680 1,005,080 3,096,480 Cash surplus/Deficit 51,280 403,600 1,192,520 1,177,520 Financing    Borrowing 15,000 15,000    Repayment -15,000 -15,000    Interest -300 -300 Net cash from Financing 15,000 0 -15,300 -300 Budgeted ending cash balance 66,280 403,600 1,177,220 1,177,220 Earings Unlimited Budgeted Income Statement For the three month ended June 30 Particulars Amount ($) Amount ($) Sales 4,492,000 Less: Cost of goods sold (224,600*5.6) 1,257,760 Variable expenses: Commissions 179,680 Interest expense 300 Insurance (4,600*3) 13,800 193,780 Contribution Margin 3,040,460 Fixed Expenses: Advertising 1,080,000 Rent 102,000 Salaries 414,000 Depreciation (30,000*3) 90,000 Utilities 45,000 1,731,000 Net operating Income 1,309,460 Dividend Paid 27,000 Net Income 1,282,460 Earings Unlimited Budgeted balance Sheet Jun-30 Assets Cash 1,177,220 Accounts Receivable 1,057,600 Inventory (13,280*5.6) 74,368 Property and equipment Net (1110000+24,000+56,000-90,000) 1,100,000 Prepaid insurance (29,000-13,800) 15,200 Total assets 3,424,388 Liabilities and Stockholders' Equity Accounts Payable purchases 126,560 Dividend payable 27,000 Common Stock 1,120,000 Retained earnings (868,368+1,282,460) 2,150,828 Total liabilities and stockholders' equity 3,424,388

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.