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Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been...
Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]
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—$13 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) | 20,600 | June (budget) | 50,600 |
| February (actual) | 26,600 | July (budget) | 30,600 |
| March (actual) | 40,600 | August (budget) | 28,600 |
| April (budget) | 65,600 | September (budget) | 25,600 |
| May (budget) | 100,600 | ||
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 $4.30 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 | $ | 230,000 | |
| Rent | $ | 21,000 | |
| Salaries | $ | 112,000 | |
| Utilities | $ | 8,500 | |
| Insurance | $ | 3,300 | |
| Depreciation | $ | 17,000 | |
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $17,500 in new equipment during May and $43,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $17,250 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 | $ | 77,000 |
| Accounts receivable ($34,580 February sales; $422,240 March sales) | 456,820 | |
| Inventory | 112,832 | |
| Prepaid insurance | 22,500 | |
| Property and equipment (net) | 980,000 | |
| Total assets | $ | 1,649,152 |
| Liabilities and Stockholders’ Equity | ||
| Accounts payable | $ | 103,000 |
| Dividends payable | 17,250 | |
| Common stock | 860,000 | |
| Retained earnings | 668,902 | |
| Total liabilities and stockholders’ equity | $ | 1,649,152 |
The company maintains a minimum cash balance of $53,000. 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 $53,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
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 $53,000.
Prepare a master budget for the three-month period ending June 30 that includes 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 $53,000. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
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Expert Solution
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| Earrings Unlimited | Note | ||||||
| Sales Budget | February | March | April | May | June | April- Jun Qtr. | |
| Sales (units) | 26,600.00 | 40,600.00 | 65,600.00 | 100,600.00 | 50,600.00 | 216,800.00 | A |
| Sell Price | 13.00 | 13.00 | 13.00 | 13.00 | 13.00 | B | |
| Sales Budget | 345,800.00 | 527,800.00 | 852,800.00 | 1,307,800.00 | 657,800.00 | 2,818,400.00 | C=A*B |
| Collection Budget | February | March | April | May | June | April- Jun Qtr. | |
| Sales Budget | 345,800.00 | 527,800.00 | 852,800.00 | 1,307,800.00 | 657,800.00 | 2,818,400.00 | See C |
| 20% collected in same month | 170,560.00 | 261,560.00 | 131,560.00 | 563,680.00 | D= C*20% | ||
| 70% collected in next month | 369,460.00 | 596,960.00 | 915,460.00 | 1,881,880.00 | E= 70% of C of previous month | ||
| 10% collected in second month | 34,580.00 | 52,780.00 | 85,280.00 | 172,640.00 | F= 10% of C of previous to previous month | ||
| Expected cash collections | 574,600.00 | 911,300.00 | 1,132,300.00 | 2,618,200.00 | G=D+E+F |
| Purchase Budget | April | May | June | April- Jun Qtr. | July | |
| Sales (units) | 65,600.00 | 100,600.00 | 50,600.00 | 216,800.00 | 30,600.00 | See A |
| Add: Desired Ending Inventory | 40,240.00 | 20,240.00 | 12,240.00 | H= 40% of A of next month | ||
| Total bracelet needed | 105,840.00 | 120,840.00 | 62,840.00 | I= A+H | ||
| Less: Expected Beginning Inventory | 26,240.00 | 40,240.00 | 20,240.00 | J= 40% of A | ||
| Bracelet Purchase Budget | 79,600.00 | 80,600.00 | 42,600.00 | 202,800.00 | K=I-J |
| Payment Budget | April | May | June | April- Jun Qtr. | |
| Bracelet Purchase Budget | 79,600.00 | 80,600.00 | 42,600.00 | 202,800.00 | See K |
| Purchase price | 4.30 | 4.30 | 4.30 | L | |
| Purchase cost | 342,280.00 | 346,580.00 | 183,180.00 | 872,040.00 | M=K*L |
| 50% paid in same month | 171,140.00 | 173,290.00 | 91,590.00 | 436,020.00 | N= M*50% |
| 50% paid in next month | 103,000.00 | 171,140.00 | 173,290.00 | 447,430.00 | O= 50% of M of previous month |
| Cash disbursements for merchandise purchases | 274,140.00 | 344,430.00 | 264,880.00 | 883,450.00 | P=N+O |
| Sales Commission Budget | April | May | June | April- Jun Qtr. | |
| Sales Budget | 852,800.00 | 1,307,800.00 | 657,800.00 | 2,818,400.00 | See C |
| Sales Commission @ 4% | 34,112.00 | 52,312.00 | 26,312.00 | 112,736.00 | Q= C*4% |
| Cash budget | April | May | June | April- Jun Qtr. | |
| Expected cash collections | 574,600.00 | 911,300.00 | 1,132,300.00 | 2,618,200.00 | See P |
| Total Cash Receipts | 574,600.00 | 911,300.00 | 1,132,300.00 | ||
| Estimated cash payments for | |||||
| Merchandise purchases | 274,140.00 | 344,430.00 | 264,880.00 | 883,450.00 | |
| Sales Commission | 34,112.00 | 52,312.00 | 26,312.00 | 112,736.00 | |
| Advertising | 230,000.00 | 230,000.00 | 230,000.00 | 690,000.00 | |
| Rent | 21,000.00 | 21,000.00 | 21,000.00 | 63,000.00 |
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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...
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LO8-8, LO8-9, LO8-10] 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...
Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been...Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4,
LO8-8, LO8-9, LO8-10]
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...
Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been...Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4,
LO8-8, LO8-9, LO8-10]
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...
Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been...Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4,
LO8-8, LO8-9, LO8-10]
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...
Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been...Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4,
LO8-8, LO8-9, LO8-10]
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...
Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been...Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4,
LO8-8, LO8-9, LO8-10]
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...
Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been...Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4,
LO8-8, LO8-9, LO8-10]
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...
Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been...Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4,
LO8-8, LO8-9, LO8-10]
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...
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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...
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