You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2577845 • 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—$18 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 $5.90 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 $25,500 in new equipment during May and $59,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $29,250 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 $69,000. 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 $69,000 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 $69,000.
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) 23,800 June (budget) 53,800 February (actual) 29,800 July (budget) 33,800 March (actual) 43,800 August (budget) 31,800 April (budget) 68,800 September (budget) 28,800 May (budget) 103,800Explanation / Answer
1(a) Sales Budget: April May June Quarter Budgeted Sales In Units 68,800 103,800 53,800 226,400 Selling Price Per Unit 18 18 18 18 Total sales 1,238,400 1,868,400 968,400 4,075,200 b Schedule of expected cash collections: February sales 107,280 107,280 March sales 157,680 551,880 709,560 April Sales 247,680 866,880 123,840 1,238,400 May Sales 373,680 1,307,880 1,681,560 Junne Sales 193,680 193,680 Total Cash Collections 512,640 1,792,440 1,625,400 3,930,480 c Merchandise purchases budget: Budget Sales In units 68,800 103,800 53,800 226,400 Add:Budgeted ending Inventory 41,520 21,520 13,520 13,520 Less:Beginning Inventory 17,520 41,520 21,520 17,520 Required Unit Purchases 92,800 83,800 45,800 222,400 Unit Cost 5.90 5.90 5.90 5.90 Required $ purchases 547,520 494,420 270,220 1,312,160 d Budgeted cash disbursements for merchandise purchases: March Purchases 158,710 158,710 April Purchases 273,760 273,760 547,520 May Purchases 247,210 247,210 494,420 June Purchases 135,110 135,110 432,470 520,970 382,320 1,335,760
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