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

a			Jan	Feb	Mar	April	May	June	July		Total For April to June
	Expected Sales in Units		23400	29400	43400	68400	103400	53400	33400		225200
	Exected Sales in $ @ $16		374400	470400	694400	1094400	1654400	854400	534400		3603200
			In $
b	Expected Collections	20%				218880	330880	170880			720640
		70%				486080	766080	1158080			2410240
		10%				47040	69440	109440			225920
	Budgetted Receipts from Creditors					752000	1166400	1438400			3356800
c	PRODUCTION BUDGET		In Units
	Opening Inventory				17360	27360	41360	21360			90080
	Closing Inventory			17360	27360	41360	21360	13360			76080
	Production Sales + Closing - Opening)				53400	82400	83400	45400			211200
	Purchase Cost $ 5.70				304380	469680	475380	258780			1203840
			In $
d	Cash Payment to Supliers	50%				234840	237690	129390			601920
		50%				152190	234840	237690			624720
	Total					387030	472530	367080			1226640

2.

Cash Budget
Opening Cash Balance					91000	-176056	110638
Borrowings to make minimum Cash balance $67000					0	244000
Expected Receivables					752000	1166400	1438400
Total Cash Inflow					843000	1234344	1549038
Accounts Payables paid					387030	472530	367080
Variable Exxenditure Paid
Advertisement					370000	370000	370000
Rent					35000	35000	35000
Salaries					140000	140000	140000
Utilities					15500	15500	15500
Salles Commission					43776	66176	34176
Equipment purchase						24500	57000
Dividends Paid					27750
Interest on Borrowing Paid							4880
Borrowing Repaid							244000
Total Cash Outflow					1019056	1123706	1267636
Closing Cash Balance					-176056	110638	281402

Budgetted Income Statement					April	May	June
Sales:					1094400	1654400	854400
Less : Cost of Goods Sold
Opening Inventory					155952	235752	121752
Manufacturing Costs		$5.70			469680	475380	258780
Less : Closing Inventory					235752	121752	76152
Cost of Ggoods Sold					389880	589380	304380
Contribution					704520	1065020	550020
Variable Exxenditure Paid
Advertisement					370000	370000	370000
Rent					35000	35000	35000
Salaries					140000	140000	140000
Utilities					15500	15500	15500
Insurance					4700	4700	4700
Depreciation					31000	31000	31000
Salles Commission					43776	66176	34176
Interest on Bank Borrowings							4880
Dividends Payable							27750
Net Profit Transferred to Retained Earnings					64544	402644	-112986

Budgetted Balance Sheet
Asset
Cash			281402
Accounts Receivable			848960
Inventory			76152
Prepaid Insurance			15400
Property & Equipment ( Net)			1108500
			2330414
Liability and Share Holder's Equity
Accounts payable			94200
Dividends Payable			27750
Common Stock			1140000
Retained earnings		714262
		354202	1068464
			2330414