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—$18 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)	22,800	June (budget)	52,800
February (actual)	28,800	July (budget)	32,800
March (actual)	42,800	August (budget)	30,800
April (budget)	67,800	September (budget)	27,800
May (budget)	102,800

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 $5.40 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	$	340,000
Rent	$	32,000
Salaries	$	134,000
Utilities	$	14,000
Insurance	$	4,400
Depreciation	$	28,000

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

The company plans to purchase $23,000 in new equipment during May and $54,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $25,500 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	$	88,000
Accounts receivable ($51,840 February sales; $616,320 March sales)		668,160
Inventory		146,448
Prepaid insurance		28,000
Property and equipment (net)		1,090,000
Total assets	$	2,020,608
Liabilities and Stockholders’ Equity
Accounts payable	$	114,000
Dividends payable		25,500
Common stock		1,080,000
Retained earnings		801,108
Total liabilities and stockholders’ equity	$	2,020,608

The company maintains a minimum cash balance of $64,000. 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 $64,000 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 $64,000.

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

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1a. Sales Budget
		April	May	June	Total
Budgeted No of Units		67800	102800	52800	223400
Selling Price per unit		$                  18	$                  18	$                  18	$                      18
Budgeted total Sale		$   1,220,400	$   1,850,400	$       950,400	$       4,021,200
1b. Schedule of Expected Cash Collection
Same Month	20%
Following	70%
Second Month	10%
		April	May	June	Total
February Sales	518400	$         51,840			$             51,840
March Sales	770400	$       539,280	$         77,040		$           616,320
April Sales	$ 1,220,400	$       244,080	$       854,280	$       122,040	$       1,220,400
May Sales	$ 1,850,400		$       370,080	$   1,295,280	$       1,665,360
June Sales	$     950,400			$       190,080	$           190,080
Total Expected Cash Collection		$       835,200	$   1,301,400	$   1,607,400	$       3,744,000
1c. Budgeted Merchandise Purchase
		April	May	June	Total
Budgeted Sale Units		67800	102800	52800	223400
Add: Ending Inventory		41120	21120	13120	13120
Total Needs		108920	123920	65920	236520
Less: Beginning Inventory		-27120	-41120	-21120	-27120
Budgeted Merchandise Purchase		81800	82800	44800	209400
Per Unit Purchase Price		$              5.40	$              5.40	$              5.40	$                  5.40
Total Purchase $		$       441,720	$       447,120	$       241,920	$       1,130,760
1d. Schedule of expected cash disbursment:
		April	May	June	Total
March Purchase		$       114,000			$           114,000
April Purchase		$       220,860	$       220,860		$           441,720
May Purchase			$       223,560	$       223,560	$           447,120
June Purchase				$       120,960	$           120,960
Total Expected Cash Disbursment for Inventory		$       334,860	$       444,420	$       344,520	$       1,123,800
2. Cash Budget
		April	May	June	Total
Beginning Cash Balance		$         88,000	$         64,024	$       233,288	$             88,000
Add: Expected Cash Receipt from Customers		$       835,200	$   1,301,400	$   1,607,400	$       3,744,000
Total Cash Available	A	$       923,200	$   1,365,424	$   1,840,688	$       3,832,000
Expected Cash payment for:
Purchases		$       334,860	$       444,420	$       344,520	$       1,123,800
Sales Commission	4% of Sale	$         48,816	$         74,016	$         38,016	$           160,848
Advertising		$       340,000	$       340,000	$       340,000	$       1,020,000
Rent		$         32,000	$         32,000	$         32,000	$             96,000
Salaries		$       134,000	$       134,000	$       134,000	$           402,000
Utilities		$         14,000	$         14,000	$         14,000	$             42,000
Insurance	Paid in Nov	$                   -	$                   -	$                   -	$                       -
Depreciation	Non Cash	$                   -	$                   -	$                   -	$                       -
New Equipment			$         23,000	$         54,000	$             77,000
Dividends		$         25,500			$             25,500
Total Cash Disbursment	B	$       929,176	$   1,061,436	$       956,536	$       2,947,148
Minimum Balance Required	C	$         64,000	$         64,000	$         64,000	$             64,000
Excess Cash/(Deficit)		$        -69,976	$       239,988	$       820,152	$           820,852
Financing:
Borrowing		$         70,000			$             70,000
Repayment			$        -70,000		$            -70,000
Interest			$              -700		$                  -700
Ending Cash Balance		$         64,024	$       233,288	$       884,152	$           884,152
3. Budgeted Income Statement:
Sales Revenue		$   4,021,200
Less: Variable Cost:
Cost of Purchasing Rings (223400*5.4)		$   1,206,360
Sales Commission		$       160,848
Contribution Margin		$   2,653,992
Less: Fixed Assets:
Advertising	$ 1,020,000
Rent	$       96,000
Salaries	$     402,000
Utilities	$       42,000
Insurance	$       13,200
Depreciation	$       84,000	$   1,657,200
Income before Tax		$       996,792
4. Balance Sheet:
Assets
Cash	$	884,152
Accounts receivable (May 185040, June 760320)		945,360
Inventory 13120*5.4		70,848
Prepaid insurance 28000-13200		14,800
Property and equipment (net) (1090000+77000-84000)		1,083,000
Total assets	$	2,998,160
Liabilities and Stockholders’ Equity
Accounts payable (June Pur)	$	120,960
Dividends payable		25,500
Common stock		1,080,000
Retained earnings (801108+996792-25500)		1,772,400
Total liabilities and stockholders’ equity	$	2,998,860