Question

In: Accounting

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...

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:

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

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

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

    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 $50,000.

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.

Solutions

Expert Solution

Solution:

Part 1a –

Sales Budget

April

May

June

Quarter total

Expected Unit Sales

65,000

100,000

50,000

215,000

Unit Selling Price

$10

$10

$10

$10

Budgeted Sales in dollars

$650,000

$1,000,000

$500,000

$2,150,000

Part 1b – A schedule of expected cash collections, by month and in total

Schedule of Expected Cash Collection

Sales on Account

% Collected

April

May

June

Quarter

(From part 1)

February Sales (Collected in April)

$260,000

10%

$26,000

March Sales (Collect in April)

$400,000

70%

$280,000

March Sales (Collect in May)

$400,000

10%

$40,000

April Sales (Collect in April)

$650,000

20%

$130,000

April Sales (Collect in May)

$650,000

70%

$455,000

April Sales (Collect in June)

$650,000

10%

$65,000

May Sales (Collect in May)

$1,000,000

20%

200000

May Sales (Collect in June)

$1,000,000

70%

700000

June Sales (Collect in June)

$500,000

20%

$100,000

Total Expected Cash Collection

$436,000

$695,000

$865,000

$1,996,000

Part 1c – A merchandise purchases budget in units and in dollars

Merchandise Purchase Budget

Working

April

May

June

Quarter

July

August

Next Month's Expected Unit Sales

100000

50000

30000

28000

25,000

Ratio of Ending inventory to future sales

40%

40%

40%

40%

40%

Budgeted Finished Goods Ending Inventory (units)

40000

20000

12000

11200

10,000

Add: Budgeted Sales (units)

65000

100000

50000

30000

28,000

Required units of available production

105000

120000

62000

41200

38,000

Less: Budgeted Beginning Inventory (Ending Finished Goods Inventory of last month)

26000

40000

20000

12000

11200

Units to be purchased

79000

80000

42000

201000

29,200

26,800

Purchase Price per Unit

$4

$4

$4

$4

Budgeted Purchases in dollars

$316,000

$320,000

$168,000

$804,000

Part 1d – A schedule of expected cash disbursements for merchandise purchases, by month and in total

Schedule of Expected Cash Disbursements for merchandise purchases

April

May

June

Quarter Ending

Accounts Payable beginning

$100,000

April Purchases (50% in April & 50% in May)

$158,000

$158,000

May Purchases (50% in May & 50% in June)

$160,000

$160,000

June Purchases (50% in June)

$84,000

Total Expected Cash disbursements

$258,000

$318,000

$244,000

$820,000

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for other parts problems


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