Question

The company sells many styles of earrings, but all are sold for the same price—$16 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)	21,200	June (budget)	51,200
February (actual)	27,200	July (budget)	31,200
March (actual)	41,200	August (budget)	29,200
April (budget)	66,200	September (budget)	26,200
May (budget)	101,200

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 $4.6 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:
Sales commissions		4%	of sales
Fixed:
Advertising	$	260,000
Rent	$	24,000
Salaries	$	118,000
Utilities	$	10,000
Insurance	$	3,600
Depreciation	$	20,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $19,000 in new equipment during May and $46,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $19,500 each quarter, payable in the first month of the following quarter.

A listing of the company’s ledger accounts as of March 31 is given below:

Assets
Cash	$	80,000
Accounts receivable ($43,520 February sales;    $527,360 March sales)		570,880
Inventory		121,808
Prepaid insurance		24,000
Property and equipment (net)		1,010,000
Total assets	$	1,806,688
Liabilities and Stockholders’ Equity
Accounts payable	$	106,000
Dividends payable		19,500
Common stock		920,000
Retained earnings		761,188
Total liabilities and stockholders’ equity	$	1,806,688

The company maintains a minimum cash balance of $56,000. 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 $56,000 in cash.

Required:
1.	Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

a.	A sales budget, by month and in total.

b.	A schedule of expected cash collections from sales, by month and in total.

c.	A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round "Unit cost" answers to 2 decimal places.)
d.	A schedule of expected cash disbursements for merchandise purchases, by month and in total.

Answer 1

SALES BUDGET
			Jan	Feb	mar	April	May	June	Quarter
Budgeted Sales units			21,200	27,200	41,200	66,200	101,200	51,200	218,600
Selling price per unit			16	16	16	16	16	16	16
Total Sales			339,200	435,200	659,200	1,059,200	1,619,200	819,200	3,497,600
EXPECTED CASH COLLECTIONS
			APRIL	MAY	JUNE	QUARTER
Feb month sales			43,520			43,520
March Month Sales			461,440	65920		527,360
April Month Sales			211840	741440	105920	1,059,200
May Month Sales				323,840	1,133,440	1,457,280
June Month sales					163840	163,840
Total Cash Collections			716,800	1,131,200	1,403,200	3,251,200
RAW MATERIAL PURCHASE BUDGET
			APRIL	MAY	JUNE	QUARTER	JULY
Budgeted Sales units			66,200	101,200	51,200	218,600	31,200
Add: Desired Ending Inventory			40,480	20,480	12,480	12,480
Total needs			106,680	121,680	63,680	231,080
Less: Beginning Inventory			26,480	40,480	20,480	26,480
Purchase Units			80,200	81,200	43,200	204,600
Cost price per unit			4.60	4.60	4.60	4.60
Budgeted Purchase in $			368,920	373,520	198,720	941,160
EXPECTED CASH PAYMENTS
			APRIL	MAY	JUNE	YEAR
Beginning Accounts payable			106,000			106,000
April month purchases			184460	184460		368,920
May month purchases				186760	186760	373,520
June Month Purchases					99360	99,360
Total Cash disbursement			290,460	371,220	286,120	947,800