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.

	Sales Budget April May June Quarter Budgeted unit sales Selling price per unit Total sales

  

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

	Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February sales March sales April sales May sales June sales Total cash collections

  

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost of purchases to 1 decimal place.)

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

  

  

	Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable April purchases May purchases June purchases Total cash payments

2. A cash budget. Show the budget by month and in total. (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.

	Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 Variable expenses: Fixed expenses:

4. A budgeted balance sheet as of June 30.

Yes, this is a long and challenging problem. I couldn’t get all of the tables to post, only some would. Thanks for the help!

Answer 1

1. a. Sales Budget:

Earrings Unlimited
Sales Budget
For the quarter ended June 30
	April	May	June	Quarter
Budgeted Unit Sales	69,000	104,000	54,000	227,000
Selling Price per Unit	$ 19	$ 19	$ 19	$ 19
Total Sales	$ 1,311,000	$ 1,976,000	$ 1,026,000	$ 4,313,000

b. Schedule of Expected Cash Collections from Sales:

	April	May	June	Quarter
	$	$	$	$
February Sales	57,000	0	0	57,000
March Sales	585,200	83,600	0	668,800
April Sales	262,200	917,700	131,100	1,311,000
May Sales	0	395,200	1,383,200	1,778,400
June Sales	0	0	205,200	205,200
Total Collections	$ 904,400	$ 1,396,500	$ 1,719,500	$ 4,020,400

c. Merchandise Purchase Budget:

	April	May	June	Quarter
Budgeted Unit Sales	69,000	104,000	54,000	227,000
Add: Desired Ending Inventory	41,600	21,600	13,600	13,600
Total Inventory Needs	110,600	125,600	67,600	240,600
Less: Beginning Inventory	27,600	41,600	21,600	27,600
Budgeted Unit Purchases	83,000	84,000	46,000	213,000
Cost per Unit	$ 6	$ 6	$ 6	$ 6
Budgeted Dollar Purchases	$ 498,000	$ 504,000	$ 276,000	$ 1,278,000

d. Schedule of Expected Cash Disbursements for Merchandise Purchases:

	April	May	June	Quarter
	$	$	$	$
Accounts Payable	120,000	0	0	120,000
April Purchases	249,000	249,000	0	498,000
May Purchases	0	252,000	252,000	504,000
June Purchases	0	0	138,000	138,000
Total Cash Disbursements	$ 369,000	$ 501,000	$ 390,000	$ 1,260,000

2. Cash Budget:

	April	May	June	Quarter
	$	$	$	$
Beginning Cash Balance	94,000	70,960	260,420	94,000
Cash Collections from Sales	904,400	1,396,500	1,719,500	4,020,400
Total Cash Available	998,400	1,467,460	1,979,920	4,114,400
Less: Cash Disbursements
Direct Material Purchases	369,000	501,000	390,000	1,260,000
Sales Commission Expense	52,440	79,040	41,040	172,520
Advertising Expense	400,000	400,000	400,000	1,200,000
Rent Expense	38,000	38,000	38,000	114,000
Salaries Expense	146,000	146,000	146,000	438,000
Utilities Expense	17,000	17,000	17,000	51,000
Purchase of New Equipment	0	26,000	60,000	86,000
Dividends	30,000	0	0	30,000
Total Cash Disbursements	1,052,440	1,207,040	1,092,040	3,351,520
Cash Surplus ( Deficit)	(54,040)	260,420	887,880	762,880
Financing
Borrowing	125,000	0	0	125,000
Repayment	0	0	(125,000)	(125,000)
Interest	0	0	(3,750)	(3,750)
Total Financing	125,000	125,000	(128,750)
Ending Cash Balance	70,960	260,420	759,130	759,130

3. Budgeted Income Statement:

Earrings Unlimited
Budgeted Income Statement
For the quarter ended June 30
	$	$
Sales Revenue		4,313,000
Less: Variable Expenses
Cost of Goods Sold ( 227,000 units x $ 6)	1,362,000
Sales Commission	172,520
Total Variable Expenses		1,534,520
Contribution Margin		2,778,480
Fixed Expenses:
Advertising Expense	1,200,000
Rent Expense	114,000
Salaries Expense	438,000
Utilities Expense	51,000
Insurance Expense	15,000
Depreciation Expense	102,000
Total Fixed Expenses		1,920,000
Income from Operations		858,480
Interest Expense		3,750
Net Income		$ 854,730

4. Balance Sheet:

Earrings Unlimited
Balance Sheet
June 30
Assets	$
Cash	759,130
Accounts Receivable	1,018,400
Inventory	81,600
Prepaid Expenses	16,000
Property and Equipment, net	1,134,000
Total Assets	$ 3,009,130
Liabilities and Stockholders' Equity	$
Accounts Payable	138,000
Dividends Payable	30,000
Common Stock	1,200,000
Retained Earnings	1,641,130
Total Liabilities and Stockholders' Equity	$ 3,009,130