Question
In: Accounting
You have just been contracted as a new management trainee by Earrings Unlimited, a distributor of...
You have just been contracted as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets 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:
|
January (actual) |
20,000 |
|
February (actual) |
26,000 |
|
March (actual) |
40,000 |
|
April (budget) |
65,000 |
|
May (budget) |
100,000 |
|
June (budget) |
50,000 |
|
July (budget) |
30,000 |
|
August (budget) |
28,000 |
|
September (budget) |
25,000 |
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 bracelets sold in the following month.
Suppliers are paid $4 for each bracelet. 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 discounts. 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 expenses:
Sales commissions 4% of sales
Fixed expenses:
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.
Other relevant data is given below:
Cash balance as of March 31 $74,000
Inventory balance as of March 31 $104,000
Merchandise purchases for March $200,000
The company maintains a minimum cash balance of at least $50,000 at the end of each month. 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 the exact amount needed 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 will pay the bank all of the accrued interest on the loan and as much of the loan as possible while still retaining at least $50,000 in cash.
Required:
Prepare a cash budget for the three-month period ending June 30. Include the following detailed budgets:
1.
a. A sales budget, by month and in total.
b. A schedule of expected cash collections from sales, 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.
Solutions
Expert Solution
| Earrings Unlimited | ||||||
| 1a) | Sales Budget | |||||
| Months | April | May | June | Quarter | ||
| Budgeted unit sales | 65000 | 100000 | 50000 | 215000 | ||
| Selling Price Per unit | $ 10.00 | $ 10.00 | $ 10.00 | $ 10.00 | ||
| Total sales | $ 6,50,000.00 | $ 10,00,000.00 | $ 5,00,000.00 | $ 21,50,000.00 | ||
| 1b) | ||||||
| Schedule of expected cash collections | ||||||
| Months Sales | April | May | June | Quarter | ||
| February sales=(26000*$10)*10% in April | $ 2,60,000.00 | $ 26,000.00 | $ 26,000.00 | |||
| March Sales=(40000*$10)*70% in April and (40000*$10)*10% in May | $ 4,00,000.00 | $ 2,80,000.00 | $ 40,000.00 | $ 3,20,000.00 | ||
| April sales=($650000*20%) in April,($650000*70%) in May and ($650000*10%) in June | $ 6,50,000.00 | $ 1,30,000.00 | $ 4,55,000.00 | $ 65,000.00 | $ 6,50,000.00 | |
| May sales=($1000000)*20% in May and ($100000*70% ) in June | $ 10,00,000.00 | $ 2,00,000.00 | $ 7,00,000.00 | $ 9,00,000.00 | ||
| June Sales=($500000*20%) in June | $ 5,00,000.00 | $ 1,00,000.00 | $ 1,00,000.00 | |||
| Total Cash collections | $ 28,10,000.00 | $ 4,36,000.00 | $ 6,95,000.00 | $ 8,65,000.00 | $ 19,96,000.00 | |
| 1c) | Merchandise Purchase Budget in Units and Dollars | |||||
| April | May | June | Quarter | |||
| Budgeted Unit Sales=(A) | 65000 | 100000 | 50000 | 215000 | ||
| Add:Ending Inventory=(B) | 40000 | 20000 | 12000 | 12000 | ||
| Total Needs=(C )=(A)+(B) | 105000 | 120000 | 62000 | 227000 | ||
| Less: Opening Inventory=(D ) | 26000 | 40000 | 20000 | 26000 | ||
| Required Purchases=(E )=(C )-(D) | 79000 | 80000 | 42000 | 201000 | ||
| Cost of Purchase Per Unit=(F) | $ 4.00 | $ 4.00 | $ 4.00 | $ 4.00 | ||
| Total Cost of Purchase=(E )*(F) | $ 3,16,000.00 | $ 3,20,000.00 | $ 1,68,000.00 | $ 8,04,000.00 | ||
| April | May | June | Quarter | |||
| Ending Inventory | (100000*40%) | (50000*40%) | (30000*40%) | |||
| Beginning Inventory | ($104000/$4) | (100000*40%) | (50000*40%) | |||
| 1d) | Budgeted Cash disbursement of Merchandise Purchase | |||||
| Months | April | May | June | Quarter | ||
| Accounts Payable | $ 1,00,000.00 | $ 1,00,000.00 | ||||
| April Purchase | $ 1,58,000.00 | $ 1,58,000.00 | $ 3,16,000.00 | |||
| May Purchase | $ 1,60,000.00 | $ 1,60,000.00 | $ 3,20,000.00 | |||
| June Purchase | $ 84,000.00 | $ 84,000.00 | ||||
| Total Cash Payments | $ 2,58,000.00 | $ 3,18,000.00 | $ 2,44,000.00 | $ 8,20,000.00 | ||
| Months | April | May | June | |||
| April Purchase | ($316000*1/2) | ($316000*1/2) | ||||
| May Purchase | ($320000*1/2) | ($320000*1/2) | ||||
| June Purchase | ($168000*1/2) | |||||
| Merchandise Purchase for March Paid in April | ($200000*1/2) | |||||
| Earrings Unlimited Cash Budget | ||||||
| 2) | For the three months ending June 30th | |||||
| Months | April | May | June | Quarter | ||
| Cash Balance | $ 74,000.00 | $ 50,000.00 | $ 50,000.00 | $ 74,000.00 | ||
| Add: Collections from customer | $ 4,36,000.00 | $ 6,95,000.00 | $ 8,65,000.00 | $ 19,96,000.00 | ||
| Total Cash available=(A) | $ 5,10,000.00 | $ 7,45,000.00 | $ 9,15,000.00 | $ 20,70,000.00 | ||
| Less: Disbursement |
 ekkarill92 answered 2 years agoRelated SolutionsYou have just been contracted as a new management trainee by Earrings Unlimited, a distributor of...You have just been contracted as a new management trainee by
Earrings Unlimited, a distributor of earrings to various retail
outlets 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...
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...
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...
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...
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...
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...
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...
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 comprehensive budgets for the upcoming second quarter in
order to show management the...
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...
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...
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