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—$15 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)	21,800	June (budget)	51,800
February (actual)	27,800	July (budget)	31,800
March (actual)	41,800	August (budget)	29,800
April (budget)	66,800	September (budget)	26,800
May (budget)	101,800

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 $4.90 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	$	290,000
Rent	$	27,000
Salaries	$	124,000
Utilities	$	11,500
Insurance	$	3,900
Depreciation	$	23,000

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

The company plans to purchase $20,500 in new equipment during May and $49,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,750 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	$	83,000
Accounts receivable ($41,700 February sales; $501,600 March sales)		543,300
Inventory		130,928
Prepaid insurance		25,500
Property and equipment (net)		1,040,000
Total assets	$	1,822,728
Liabilities and Stockholders’ Equity
Accounts payable	$	109,000
Dividends payable		21,750
Common stock		980,000
Retained earnings		711,978
Total liabilities and stockholders’ equity	$	1,822,728

The company maintains a minimum cash balance of $59,000. 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 $59,000 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 $59,000.

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

1	Sales budget	April	May	June	Quarter
	Sales in units	66800	101800	51800	220400
	Per unit	15	15	15	15
	Sales	1002000	1527000	777000	3306000
2	Budgeted Cash receipt	April	May	June	Quarter
	February sales	41700			41700
	March sale	438900	62700		501600
	April sales	200400	701400	100200	1002000
	May sales		305400	1068900	1374300
	June sales			155400	155400
	Total collection	681000	1069500	1324500	3075000
3	Production budget	April	May	June	Total
	Sales in units	66,800	1,01,800	51,800	2,20,400
	Add ending inventory	40,720	20,720	12,720	12,720
	Inventory needed	1,07,520	1,22,520	64,520	2,33,120
	Less beginning inventory	26,720	40,720	20,720	26,720
	Required Purchase	80,800	81,800	43,800	2,06,400
	Cost per unit @4	4.9	4.9	4.9	4.9
	Cost of purchase @4 per unit	395920	400820	214620	1011360
4	Cash Disbursement	April	May	June	Total
	March purchase	109000			109000
	April purchase	197960	197960		395920
	May purchase		200410	200410	400820
	June purchase			107310	107310
	Total disbursements	306960	398370	307720	1013050
5	Cash budget
		April	May	June	Quarter
	Beginning cash balance	83,000	59,710	1,96,760	83,000
Add	Cash collections	681000	1069500	1324500	3075000
	Total collections	7,64,000	11,29,210	15,21,260	31,58,000
Less	Cash disbursements
	Merchandise purchase	306960	398370	307720	1013050
	Advertising	290000	290000	290000	870000
	Rent	27000	27000	27000	81000
	Commission	40080	61080	31080	132240
	Salaries	124000	124000	124000	372000
	Utilities	11500	11500	11500	34500
	Equipment purchased		20500	49000	69500
	Dividend paid	21750
	Total payments	821290	932450	840300	2594040
	cash balance	-57,290	1,96,760	6,80,960	5,63,960
	Financing
	Loan taken	117000			117000
	Loan repaid			117000	117000
	Interest paid			3510	3510
	Ending cash balance	59,710	1,96,760	5,60,450	5,60,450