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

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