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—$11 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) 20,200 June (budget) 50,200
February (actual) 26,200 July (budget) 30,200
March (actual) 40,200 August (budget) 28,200
April (budget) 65,200 September (budget) 25,200
May (budget) 100,200

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 $4.10 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 $ 210,000
Rent $ 19,000
Salaries $ 108,000
Utilities $ 7,500
Insurance $ 3,100
Depreciation $ 15,000

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

The company plans to purchase $16,500 in new equipment during May and $41,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,750 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 $ 75,000
Accounts receivable ($28,820 February sales; $353,760 March sales) 382,580
Inventory 106,928
Prepaid insurance 21,500
Property and equipment (net) 960,000
Total assets $ 1,546,008
Liabilities and Stockholders’ Equity
Accounts payable $ 101,000
Dividends payable 15,750
Common stock 820,000
Retained earnings 609,258
Total liabilities and stockholders’ equity $ 1,546,008

The company maintains a minimum cash balance of $51,000. 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 $51,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

Please help me answer requirement 2,3, and 4

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 $51,000.

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 1a:
Sales Budget - Earrings Unlimited
Particulars April May June Total
Budgeted Sales units 65200 100200 50200 215600
Selling price per unit $11.00 $11.00 $11.00 $11.00
Total Sales $717,200.00 $1,102,200.00 $552,200.00 $2,371,600.00
Solution 1b:
Schedule of expected cash collection - Earrings Unlimited
Particulars April May June Total
Cash received for Feburary Sale $28,820.00 $28,820.00
Cash received for March Sale $309,540.00 $44,220.00 $353,760.00
Cash received for April Sale $143,440.00 $502,040.00 $71,720.00 $717,200.00
Cash received for May Sale $220,440.00 $771,540.00 $991,980.00
Cash received for June Sale $110,440.00 $110,440.00
Budgeted Cash Collection $481,800.00 $766,700.00 $953,700.00 $2,202,200.00
Solution 1c:
Merchandise Purchase Budget - Earrings Unlimited
Particulars April May June Total
Sales units 65200 100200 50200 215600
Add: Desired ending inventory (40% of next month sales) 40080 20080 12080 12080
Total needs 105280 120280 62280 227680
Less: Opening Inventory 26080 40080 20080 26080
Estimated purchase for earrings (In pairs) 79200 80200 42200 201600
Cost per pair $4.10 $4.10 $4.10 $4.10
Budgeted purchases (in dollars) $324,720.00 $328,820.00 $173,020.00 $826,560.00
Solution 1d:
Budgeted Cash disbursement for merchandise purchases - Earrings Unlimited
Particulars April May June Total
Accounts Payable $101,000.00 $101,000.00
April Purchases $162,360.00 $162,360.00 $324,720.00
May Purchases $164,410.00 $164,410.00 $328,820.00
June Purchases $86,510.00 $86,510.00
Total cash payments $263,360.00 $326,770.00 $250,920.00 $841,050.00
Solution 2:
Cash Budget - Earrnings Unlimited
For the three months ended June 30
Particulars April May June Quarter
Opening Cash balance $75,000.00 $51,502.00 $86,344.00 $75,000.00
Add: Collection from customers $481,800.00 $766,700.00 $953,700.00 $2,202,200.00
Total Cash Available $556,800.00 $818,202.00 $1,040,044.00 $2,277,200.00
Less - Cash Disbursement:
Merchandise Purchases $263,360.00 $326,770.00 $250,920.00 $841,050.00
Advertising $210,000.00 $210,000.00 $210,000.00 $630,000.00
Rent $19,000.00 $19,000.00 $19,000.00 $57,000.00
Salaries $108,000.00 $108,000.00 $108,000.00 $324,000.00
Commissions $28,688.00 $44,088.00 $22,088.00 $94,864.00
Utilities $7,500.00 $7,500.00 $7,500.00 $22,500.00
Equipment purchases $0.00 $16,500.00 $41,000.00 $57,500.00
Dividends paid $15,750.00 $0.00 $0.00 $15,750.00
Total Cash disbursement $652,298.00 $731,858.00 $658,508.00 $2,042,664.00
Excess (deficiency) of cash available over disbursements -$95,498.00 $86,344.00 $381,536.00 $234,536.00
Financing:
Borrowings $147,000.00 $0.00 $0.00 $147,000.00
Repayments $0.00 $0.00 -$147,000.00 -$147,000.00
Interest $0.00 $0.00 -$4,410.00 -$4,410.00
Total Financing $147,000.00 $0.00 -$151,410.00 -$4,410.00
Ending cash balance $51,502.00 $86,344.00 $230,126.00 $230,126.00
Solution 3:
Earrings Unlimited
Budgeted income statement
For the three months ended June 30
Particulars Amount
Sales $2,371,600.00
Variable expenses:
Cost of goods sold $883,960.00
Sales commissions $94,864.00
Total variable expenses $978,824.00
Contribution margin $1,392,776.00
Fixed expneses:
Advertising $630,000.00
Rent $57,000.00
Salaries $324,000.00
Utilities $22,500.00
Insurance $9,300.00
Depreciation $45,000.00
Interest expense $4,410.00
Total fixed expenses $1,092,210.00
Net income $300,566.00
Solution 4:
Earrings Unlimited
Budgeted Balance Sheet
30-Jun
Particulars Amount
Assets:
Cash $230,126.00
Accounts receivables ($1,102,200*10% + $552,200*80%) $551,980.00
Inventory $49,528.00
Prepaid insurance ($21,500 - $9,300) $12,200.00
Property and Equipment, Net ($960,000 + $57,500 - $45,000) $972,500.00
Total Assets $1,816,334.00
Liabilities and stockholder's Equity:
Accounts payable (173,020*50%)

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