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 comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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)	24,000	June (budget)	54,000
February (actual)	30,000	July (budget)	34,000
March (actual)	44,000	August (budget)	32,000
April (budget)	69,000	September (budget)	29,000
May (budget)	104,000

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 $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	$	400,000
Rent	$	38,000
Salaries	$	146,000
Utilities	$	17,000
Insurance	$	5,000
Depreciation	$	34,000

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

The company plans to purchase $26,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $30,000 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	$	94,000
Accounts receivable ($57,000 February sales;    $668,800 March sales)		725,800
Inventory		165,600
Prepaid insurance		31,000
Property and equipment (net)		1,150,000
Total assets	$	2,166,400
Liabilities and Stockholders’ Equity
Accounts payable	$	120,000
Dividends payable		30,000
Common stock		1,200,000
Retained earnings		816,400
Total liabilities and stockholders’ equity	$	2,166,400

The company maintains a minimum cash balance of $70,000. 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 $70,000 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.

               

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 $70,000 (Cash deficiency, repayments and interest should be indicated by a minus sign.)

        

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

      

4.	A budgeted balance sheet as of June 30.

        

Answer 1

1a. Sales Budget

Sale Price per Pair: 19

	April	MAy	June	Total
Sales in pair( Budget)	69000	104000	54000	227000
Sales ($)( Sale in air *19)	1311000	1976000	1026000	4313000

1b. Cash COllection Budget:

Collection is made 20% in month of sale;

70 % in next Month;

10% n second next month

	April	May	June
Collection from Feb Sales( apil 2nd next month10% of 570000(30000*19)	57000
Collection from March Sales(44000*19)836000	585200	83600
Collection from April Sales 1311000	262200	917700	131100
Collection from MaySales 1976000		395200	1383200
Collection from June Sales 1026000			205200
Total COllection	904400	1396500	1719500

1c.Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month so 40 % of April sales i.e.69000 units = 27600(165600/6) is available at the end of march.

Merchandise Purchase Budget in units:

	April	May	June
For April Sales(60% in APril)	41400
For May Sales(40% In April, 60 % in May)104000	41600	62400
For June Sales54000(40% In May,60 % in JUne)		21600	32400
Closing Inventoy in June(40% of July Sale34000)			13600
Total	83000	84000	46000

MErchandise Budget in Dollars: Supplier to be paid at $6 so we will muktiply unts with $6 for each coloumn

	April	May	June
For April Sale	248400
For May Sale	249600	374400
For June Sale		129600	194400
CLosing Inventor			81600
Total	498000	504000	276000

1d, Cash Disbursement for merchandise:

50 % in paid in moth of purchase & 50 % in next month,

Mach outstanding: 120000 needs to be paid in April

	April	May	June
MAr Payable	120000
For April Purchse 498000	249000	249000
For May Prchase 504000		252000	252000
Fo June Purchese 276000			138000
Total	369000	501000	390000