Return to question You have just been hired as a new management trainee by Earri

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Return to 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) January (actual) February (actual) March (actual) April (budget) May (budget) 22,800 June (budget) 28,800 July (budget) 42,800 August (budget) 67,800 September (budget) 27,800 52,800 32,800 30,800 102,800 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 $5.40 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:

Explanation / Answer

Income statement Sales (Note:1) 4021200 Less: Variable expenses Cost of goods sold (Note:2) 1130760 Sales commission (4021200*4%) 160848 1291608 Contribution margin 2729592 Less: Fixed expenses Advertising 1020000 Utilities 42000 Salary 402000 Rent 96000 Insurance (4400*3) 13200 Depreciation (28000*3) 84000 Dividend 25500 Interest expense (Refer cash budget) 1920 1684620 Net income 1044972 Note:1 April May June Total Budgeted sales (units) 67800 102800 52800 Selling price per unit ($) 18 18 18 Total sales 1220400 1850400 950400 4021200 Note:2 Budgeted cost of goods sold: April May June Budgeted sales 67800 102800 52800 Add:Ending inventory 41120 21120 13120 (40% of next month sales) 108920 123920 65920 Less:Beginning inventory 27120 41120 21120 (67800*40%) Budgeted purchase (units) 81800 82800 44800 purchase price per unit 5.4 5.4 5.4 Total Purchase in $ 441720 447120 241920 1130760 Note:3 Cash budget April May June Beginning balance (A) 88000 64024 303988 Add:Receipt from customers (Note:1) (B) 835200 1301400 1607400 Less:Payment Merchandise purchase (Note:2) 334860 444420 344520 Sales commission (4% of sales) 48816 74016 38016 Advertising 340000 340000 340000 Utilities 14000 14000 14000 Salary 134000 134000 134000 Rent 32000 32000 32000 Equipment purchase 23000 54000 Dividend paid 25500 Interest on loan (64000*1%*3) 1920 Total payment © 929176 1061436 958456 Preliminary Ending balance (A)+(B)-© -5976 303988 952932 Average balance required 64000 64000 64000 Loan to be purchased/(repaid) 70000 0 -70000 Ending balance 64024 303988 882932 Note:1 Schedule of cash receipts: April May June Total Budgeted sales (units) 67800 102800 52800 Selling price per unit ($) 18 18 18 Total sales 1220400 1850400 950400 Cash receipts: Acconts receivable Feb sales 51840 March sales-616320 at 70:10 ratio 539280 77040 April sales-1220400 244080 854280 122040 (1220400*20%) (1220400*70%) (1220400*10%) May sales-1850400 370080 1295280 (1850400*20%) (1850400*70%) June sales-950400 190080 (950400*20%) Total receipts 835200 1301400 1607400 3744000 Note:2 Budgeted merchandise purchAse: April May June Budgeted sales 67800 102800 52800 Add:Ending inventory 41120 21120 13120 (40% of next month sales) 108920 123920 65920 Less:Beginning inventory 27120 41120 21120 (67800*40%) Budgeted purchase (units) 81800 82800 44800 Expected cash disbursement for merchandise purchase April May June Total Budgeted purchase (units) 81800 82800 44800 purchase price per unit 5.4 5.4 5.4 Total Purchase in $ 441720 447120 241920 Cash disbursement: Paid in the same month -50% 220860 223560 120960 Paid in the next month -50% 220860 223560 (441720*50%) (447120*50%) Accounts payable balance on Mar 31 114000 Total disbursements 334860 444420 344520 1123800

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