Return to question You have just been hired as a new management trainee by Earri
ID: 2598045 • Letter: R
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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
MASTER BUDGET FOR THREE MONTHS APRIL MAY JUNE TOTAL SALES ( UNITS) 67,800 102,800 52,800 223,400 SALE PRICE PER UNIT 18 18 18 SALES REVENUE 1,220,400 1,850,400 950,400 4,021,200 INVENTORY REQUIRED AT MONTH END 222,048 Cost of 41120 units @ 5.40.These 41120 units isequal to 40% 0f next months' sales 114,048 Cost of 21120 units @ 5.40.These 21120 units isequal to 40% 0f next months' sales 70,848 Cost of 13120 units @ 5.40.These 13120 units isequal to 40% 0f next months' sales ACCOUNT RECEIVABLE AT MONTH END 1,053,360 Being 80% of this month's sale and 10% of previous month's sale 1,602,360 Being 80% of this month's sale and 10% of previous month's sale 945,360 Being 80% of this month's sale and 10% of previous month's sale CASH COLLECTED AGAINST RECEIVABLES 835,200 Being 20% of April sales, 70% of March and 10%of Feb sales 1,301,400 Being 20% of May sales, 70% of April and 10%of March sales 1,607,400 Being 20% of June sales, 70% of May and 10%of April sales 3,744,000 PURCHASES DURING THE MONTH 441,720 67800 sales+ 41120 inventory reduced by 27120 units opening balance= 81800 units 447,120 102800 sales+21120 inventory reduced by 41120 units opening balance = 82800 units 241,920 52800 sales+ 13120 inventory reduced by 21120 units opening balance = 44800 units 1,130,760 PURCHASE PRICE 5 5.4 5.4 ACCOUNT PAYABLE AT MONTH END 220,860 One-half is paid within the same month and balance in next month 223,560 One-half is paid within the same month and balance in next month 120,960 One-half is paid within the same month and balance in next month CASH PAID TO ACCOUNT PAYABLES 334,860 50%of previous month and 50%of current month 444,420 50%of previous month and 50%of current month 344,520 50%of previous month and 50%of current month 1,123,800 BUDGETED INCOME STATEMENT Sales revenue 1,220,400 As calculated above 1,850,400 As calculated above 950,400 As calculated above 4,021,200 TOTAL 4,021,200 Purchases 366,120 As calculated above 555,120 As calculated above 285,120 As calculated above 1,206,360 Sales commission 48,816 4% ofsales 74,016 4% ofsales 38,016 4% ofsales 160,848 Advertising 340,000 Fixed expenses 340,000 Fixed expenses 340,000 Fixed expenses 1,020,000 Rent 32,000 Fixed expenses 32,000 Fixed expenses 32,000 Fixed expenses 96,000 Salaries 134,000 Fixed expenses 134,000 Fixed expenses 134,000 Fixed expenses 402,000 Utilities 14,000 Fixed expenses 14,000 Fixed expenses 14,000 Fixed expenses 42,000 Insurance 4,400 Fixed expenses 4,400 Fixed expenses 4,400 Fixed expenses 13,200 Depreciation 28,000 Fixed expenses 28,000 Fixed expenses 28,000 Fixed expenses 84,000 Interest 2,250 2,250 TOTAL 3,026,658 OPERATING INCOME 994,542 DIVIDEND 25,500 NET INCOME 969,042 BUDGETED CASH FLOW Inflow Account receivables 835,200 1,301,400 1,607,400 3,744,000 Borrowing 75,000 75,000 Outflow Account Payable 334,860 444,420 344,520 1,123,800 Operating Expenses 573,216 598,416 562,416 1,734,048 Dividend paid 25,500 25,500 Cost of new equipment 23,000 54,000 77,000 Loan repaid and int paid 77,250 77,250 Balance (23,376) 235,564 569,214 781,402 Opening Cash 88000 64,624 300,188 88,000 Closing Cash 64,624 300,188 869,402 869,402 BUDGETED BALANCE SHEET Cash 869,402 AccountReceivable 945,360 Inventory 70,848 Prepaid Insurance 28,000 Property & equipment 1,083,000 TOTAL ASSETS 2,996,610 Account Payable 120,960 Dividend Payable 25,500 Common Stock 1,080,000 Retained earnings 1,770,150 TOTALLIABILITIES 2,996,610
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