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 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—$16 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)	23,400	June (budget)	53,400
February (actual)	29,400	July (budget)	33,400
March (actual)	43,400	August (budget)	31,400
April (budget)	68,400	September (budget)	28,400
May (budget)	103,400

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 $5.70 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	$	370,000
Rent	$	35,000
Salaries	$	140,000
Utilities	$	15,500
Insurance	$	4,700
Depreciation	$	31,000

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

The company plans to purchase $24,500 in new equipment during May and $57,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,750 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	$	91,000
Accounts receivable ($47,040 February sales; $555,520 March sales)		602,560
Inventory		155,952
Prepaid insurance		29,500
Property and equipment (net)		1,120,000
Total assets	$	1,999,012
Liabilities and Stockholders’ Equity
Accounts payable	$	117,000
Dividends payable		27,750
Common stock		1,140,000
Retained earnings		714,262
Total liabilities and stockholders’ equity	$	1,999,012

The company maintains a minimum cash balance of $67,000. 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 $67,000 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 $67,000.

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.

Answer 1

Solution:

Part 1a –

Sales Budget
	April	May	June	Quarter total
Expected Unit Sales	68,400	103,400	53,400	225,200
Unit Selling Price	$16	$16	$16	$16
Budgeted Sales in dollars	$1,094,400	$1,654,400	$854,400	$3,603,200

Part 1b –

Schedule of Expected Cash Collection
	Sales on Account (From part 1)	% Collected	April	May	June	Quarter
February Sales (Collect in April)	$470,400	10%	$47,040
March Sales (Collect in April)	$694,400	70%	$486,080
March Sales (Collect in May)	$694,400	10%		$69,440
April Sales (Collect in April)	$1,094,400	20%	$218,880
April Sales (Collect in May)	$1,094,400	70%		$766,080
April Sales (Collect in June)	$1,094,400	10%			$109,440
May Sales (Collect in May)	$1,654,400	20%		$330,880
May Sales (Collect in June)	$1,654,400	70%			$1,158,080
June Sales (Collect in June)	$854,400	20%			$170,880
Total Expected Cash Collection			$752,000	$1,166,400	$1,438,400	$3,356,800

Part 1c –

Merchandise Purchase Budget					Working
	April	May	June	Quarter	July	August
Next Month's Expected Unit Sales	103400	53400	33400		31400	28,400
Ratio of Ending inventory to future sales	40%	40%	40%		40%	40%
Budgeted Finished Goods Ending Inventory (units)	41360	21360	13360		12560	11,360
Add: Budgeted Sales (units)	68400	103400	53400		33400	31,400
Required units of available production	109760	124760	66760		45960	42,760
Less: Budgeted Beginning Inventory (Ending Finished Goods Inventory of last month)	27360	41360	21360		13360	12560
Units to be purchased	82400	83400	45400	211200	32,600	30,200
Purchase Price per Unit	$5.70	$5.70	$5.70	$5.70
Budgeted Purchases in dollars	$469,680	$475,380	$258,780	$1,203,840

                 

Part 1d –

Schedule of Expected Cash Disbursements for merchandise purchases
	April	May	June	Quarter Ending
Accounts Payable beginning	$117,000
April Purchases (50% in April & 50% in May)	$234,840	$234,840
May Purchases (50% in May & 50% in June)		$237,690	$237,690
June Purchases (50% in June)			$129,390
Total Expected Cash disbursements	$351,840	$472,530	$367,080	$1,191,450

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