Question

Managerical Accounting Chapter 8 problem 30C cash budget, how was the merchandise purchases calculated in step 2 of the problem? The orignial question states "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 $50,000. The answers given was 258,000 318,000, 244,000 and 820,000. I am asking how were figures calculated? This is my first time posting a question please advise what is incomplete about my question and how to remedy it so that I can have a better understanding of how the figures were calculated. Thank you.

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—$10 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)	20,000	June (budget)	50,000
February (actual)	26,000	July (budget)	30,000
March (actual)	40,000	August (budget)	28,000
April (budget)	65,000	September (budget)	25,000
May (budget)	100,000

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 $4 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	$200,000
Rent	$18,000
Salaries	$106,000
Utilities	$7,000
Insurance	$3,000
Depreciation	$14,000

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

The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets
Cash	$     74,000
Accounts receivable ($26,000 February sales; $320,000 March sales)	346,000
Inventory	104,000
Prepaid insurance	21,000
Property and equipment (net)	950,000
Total assets	$1,495,000
Liabilities and Stockholders’ Equity
Accounts payable	$   100,000
Dividends payable	15,000
Common stock	800,000
Retained earnings	580,000
Total liabilities and stockholders’ equity	$1,495,000

The company maintains a minimum cash balance of $50,000. 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 $50,000 in cash.

Required:

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

A sales budget, by month and in total.

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

A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

A schedule of expected cash disbursements for merchandise purchases, by month and in total.

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 $50,000.

A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

A budgeted balance sheet as of June 30.

Answer 1

1a. Sales Budget :

	April	May	June	Quarter
Budgeted Unit Sales	65,000	100,000	50,000	215,000
Selling Price	$ 10	$ 10	$ 10	$ 10
Budgeted Dollar Sales	$ 650,000	$ 1,000,000	$ 500,000	$ 2,150,000

1b. Schedule of Expected Cash Collections :

	April	May	June	Quarter
	$	$	$	$
Collection of Sales of
February	26,000			26,000
March	280,000	40,000		320,000
April	130,000	455,000	65,000	650,000
May		200,000	700,000	900,000
June			100,000	100,000
Totals	$ 436,000	$695,000	$865,000	$1,996,000

2. Merchandise Purchases Budget :

	April	May	June	Quarter
Unit Sales	65,000	100,000	50,000	215,000
Add: Desired Ending Inventory	40,000	20,000	12,000	12,000
Total Needs	105,000	120,000	62,000	227,000
Less: Beginning Inventory	26,000	40,000	20,000	26,000
Budgeted Unit Purchases	79,000	80,000	42,000	201,000
Cost per Unit	$ 4	$ 4	$ 4	$ 4
Budgeted Cost of Purchases	$ 316,000	$ 320,000	$ 168,000	$ 804,000

2b. Expected cash disbursements for Merchandise Purchases:

	April	May	June	Quarter
Cash Disbursements for purchases of
March	100,000			100,000
April	158,000	158,000		316,000
May		160,000	160,000	320,000
June			84,000	84,000
Totals	258,000	318,000	244,000	820,000

3.

Earrings Unlimited
Cash Budget
For the three months ended June 30
	April	May	June	Quarter
	$	$	$	$
Beginning Cash Balance	74,000	50,000	50,000	74,000
Add: Cash Receipts	436,000	695,000	865,000	1,996,000
Total Cash Available	510,000	745,000	915,000	2,070,000
Less: Cash Disbursements for
Merchandise Purchases	258,000	318,000	244,000	820,000
Sales Commissions	26,000	40,000	20,000	86,000
Advertising	200,000	200,000	200,000	600,000
Rent	18,000	18,000	18,000	54,000
Salaries	106,000	106,000	106,000	318,000
Utilities	7,000	7,000	7,000	21,000
Purchase of New Equipment	0	16,000	40,000	56,000
Dividends	15,000	0	0	15,000
Total Disbursements	630,000	705,000	635,000	1,970,000
Cash Surplus ( Deficit)	(120,000)	40,000	280,000	100,000
Financing
Borrowing	170,000	10,000	0	180,000
Repayment	0	0	180,000	(180,000)
Interest	0	0	5,300	(5,300)
Total Financing	170,000	180,000	(185,300)
Ending Cash Balance	50,000	50,000	94,700	94,700

4.

Earrings Unlimited
Budgeted Income Statement
For the quarter ended June 30
	$	$
Sales Revenue		2,150,000
Less: Variable Costs
Cost of Goods Sold	860,000
Sales Commissions Expense	86,000
Total Variable Costs		946,000
Contribution Margin		1,204,000
Less: Operating Expenses
Advertising Expense	600,000
Rent Expense	54,000
Salaries Expense	318,000
Insurance Expense	9,000
Utilities Expense	21,000
Depreciation Expense	42,000
Total Operating Expenses		1,044,000
Income from Operations		160,000
Interest Expense		5,300
Net Income		154,700

5.

Earrings Unlimited
Budgeted Balance Sheet
June 30
Assets	$
Cash	94,700
Accounts Receivable	500,000
Inventory	48,000
Prepaid Insurance	12,000
Property and Equipment, net	964,000
Total Assets	$1,618,700
Liabilities and Stockhoolders Equity
Accounts Payable	84,000
Dividends Payable	15,000
Common Stock	800,000
Retained Earnings	719,700
Total Liabilities and Stockholders' Equity	$ 1,618,700