You have just been hired as a new management trainee by Earrings Unlimited, a di
ID: 2578535 • 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—$19 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) 23,000
June (budget) 53,000
February (actual) 29,000
July (budget) 33,000
March (actual) 43,000
August (budget) 31,000
April (budget) 68,000
September (budget) 28,000
May (budget)103,000
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 $5.50 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 $ 350,000 Rent $ 33,000 Salaries $ 136,000 Utilities $ 14,500 Insurance $ 4,500 Depreciation $ 29,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $23,500 in new equipment during May and $55,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $26,250 each quarter, payable in the first month of the following quarter. Selected items from the company’s March 31 balance sheet are as follows: Cash $ 89,000 Accounts receivable ($55,100 February sales; $653,600 March sales) 708,700 Inventory 149,600 Accounts payable 115,000 Dividends payable 26,250 The company maintains a minimum cash balance of $65,000. 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 $65,000 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 $65,000.
Explanation / Answer
Earrings Unlimited Sales (Earrings) Actual Budgeted Selling price Jan 23000 19 per unit Feb 29000 Mar 43000 Apr 68000 May 103000 Jun 53000 Jul 33000 Aug 31000 Sep 28000 Oct Nov Dec Master Budget a. Sales budget Apr May Jun Total Sales 1292000 1957000 1007000 4256000 b. Schedule of expected cash collections Apr May Jun Total Apr Sales 904400 258400 129200 1292000 May Sales 1369900 391400 1761300 Jun Sales 704900 704900 Total 904400 1628300 1225500 3758200 c. Merchandise purchases budget (Units & Dollars) 5.5 Apr May Jun Total Unis 41200 21200 13200 75600 Dollas 226600 116600 72600 415800 d, Expected cash disbursements for purchases Apr May Jun Total April purchases 113300 113300 36300 262900 May purchases 58300 58300 116600 June purchases 36300 36300 Total 113300 171600 130900 415800 Outflows: Monthly operating expenses: Apr May Jun Total 0.04 Variable Sales Commissions 51680 78280 40280 170240 Advertising 350000 350000 350000 1050000 Rent 33000 33000 33000 99000 Salaries 136000 136000 136000 408000 Utilities 14500 14500 14500 43500 Insurance Not relevant because it is paid annually in Nov Depreciation Not relevant Equipment 23500 55000 Dividends 26250 26250 Total 611430 635280 628780 1796990 Required cash balance 65000 Cash budget Apr May Jun Total Inflows Cash collections 904400 1628300 1225500 3758200 904400 Outflows: Required cash bal 65000 65000 Operating expenses 611430 635280 628780 1875490 676430 Net flow 227970 0 0 1940490 Earrings Unlimited Sales (Earrings) Actual Budgeted Selling price Jan 23000 19 per unit Feb 29000 Mar 43000 Apr 68000 May 103000 Jun 53000 Jul 33000 Aug 31000 Sep 28000 Oct Nov Dec Master Budget a. Sales budget Apr May Jun Total Sales 1292000 1957000 1007000 4256000 b. Schedule of expected cash collections Apr May Jun Total Apr Sales 904400 258400 129200 1292000 May Sales 1369900 391400 1761300 Jun Sales 704900 704900 Total 904400 1628300 1225500 3758200 c. Merchandise purchases budget (Units & Dollars) 5.5 Apr May Jun Total Unis 41200 21200 13200 75600 Dollas 226600 116600 72600 415800 d, Expected cash disbursements for purchases Apr May Jun Total April purchases 113300 113300 36300 262900 May purchases 58300 58300 116600 June purchases 36300 36300 Total 113300 171600 130900 415800 Outflows: Monthly operating expenses: Apr May Jun Total 0.04 Variable Sales Commissions 51680 78280 40280 170240 Advertising 350000 350000 350000 1050000 Rent 33000 33000 33000 99000 Salaries 136000 136000 136000 408000 Utilities 14500 14500 14500 43500 Insurance Not relevant because it is paid annually in Nov Depreciation Not relevant Equipment 23500 55000 Dividends 26250 26250 Total 611430 635280 628780 1796990 Required cash balance 65000 Cash budget Apr May Jun Total Inflows Cash collections 904400 1628300 1225500 3758200 904400 Outflows: Required cash bal 65000 65000 Operating expenses 611430 635280 628780 1875490 676430 Net flow 227970 0 0 1940490
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