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—$13 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)	20,600	June (budget)	50,600
February (actual)	26,600	July (budget)	30,600
March (actual)	40,600	August (budget)	28,600
April (budget)	65,600	September (budget)	25,600
May (budget)	100,600

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 $4.30 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	$	230,000
Rent	$	21,000
Salaries	$	112,000
Utilities	$	8,500
Insurance	$	3,300
Depreciation	$	17,000

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

The company plans to purchase $17,500 in new equipment during May and $43,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $17,250 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	$	77,000
Accounts receivable ($34,580 February sales; $422,240 March sales)		456,820
Inventory		112,832
Prepaid insurance		22,500
Property and equipment (net)		980,000
Total assets	$	1,649,152
Liabilities and Stockholders’ Equity
Accounts payable	$	103,000
Dividends payable		17,250
Common stock		860,000
Retained earnings		668,902
Total liabilities and stockholders’ equity	$	1,649,152

The company maintains a minimum cash balance of $53,000. 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 $53,000 in cash.

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 $53,000.

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

Solution:

Construct sales budget
	April	May	June	Total
Budgeted unit sales	65600	100600	50600	216800
SP per unit	$13	$13	$13	$13
Total sales	$852,800	$1,307,800	$657,800	$2,818,400

Construct the Schedule of expected cash collections
	April	May	June	Total
Collections from February sales (26600*13*10%)	$    34,580	$               -	$                 -	$        34,580
Collections from March sales (40600*13)*70% ; 10%	$ 369,460	$      52,780	$                 -	$     422,240
Collections from April sales (20%; 70% ; 10%)	$ 170,560	$    596,960	$        85,280	$     852,800
Collections from May sales (20%; 70% ; 10%)	$             -	$    261,560	$     915,460	$ 1,177,020
Collections from June sales (20%; 70% ; 10%)	$             -	$               -	$     131,560	$     131,560
Total cash collections	$ 574,600	$    911,300	$ 1,132,300	$ 2,618,200

Schedule of Merchandise purchase budget
	April	May	June	Total
Budgeted unit Sales	65,600	100,600	50,600	216,800
Add desired ending finished goods inventory (40% of next month sales)	40,240	20,240	12,240	72,720
Total needs	105,840	120,840	62,840	289,520
Less beginning finished goods inventory	(26,240)	(40,240)	(20,240)	(86,720)
Required Purchases-units	79,600	80,600	42,600	202,800
Unit cost	4.30	4.30	4.30	4.30
Required Purchases-Dollars	342,280	346,580	183,180	872,040

Construct the schedule Of expected cash disbursements for purchases
	April	May	June	Total
Opening payables (given)	$ 103,000			$     103,000
April purchases	$ 171,140	$    171,140		$     342,280
May purchases		$    173,290	$     173,290	$     346,580
June purchases			$        91,590	$        91,590
Total cash disbursements	$274,140	$344,430	$264,880	$883,450

Cash Budget
For the months ending June 30
Particulars	April	May	June
Opening cash balance	$77,000	$53,598	$79,166
Add: Collections from customers	$574,600	$911,300	$1,132,300
Total Cash Available (A)	$651,600	$964,898	$1,211,466
Less: Cash Disbursements
Merchandise Purchases	$274,140	$344,430	$264,880
Advertising	$230,000	$230,000	$230,000
Rent	$21,000	$21,000	$21,000
Salaries	$112,000	$112,000	$112,000
Utilities	$8,500	$8,500	$8,500
Commissions @4% of sales	$34,112	$52,312	$26,312
Equipment purchase	$0	$17,500	$43,000
Dividends paid	$17,250	$0	$0
Total Cash Disbursements (B )	$697,002	$785,742	$705,692
Excess or cash available over disbursements C = A-B	-$45,402	$179,156	$505,774
Financing:
Borrowings	$99,000	$0	$0
Repayments	$0	-$99,000	$0
Interest @ 1% for 1 month	$0	-$990	$0
Total Financing D	$99,000	-$99,990	$0
Ending cash balance C+D	$53,598	$79,166	$505,774