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—$14 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) 21,600 June (budget) 51,600 February (actual) 27,600 July (budget) 31,600 March (actual) 41,600 August (budget) 29,600 April (budget) 66,600 September (budget) 26,600 May (budget) 101,600

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—$14 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)

21,600

June (budget)

51,600

February (actual)

27,600

July (budget)

31,600

March (actual)

41,600

August (budget)

29,600

April (budget)

66,600

September (budget)

26,600

May (budget)

101,600

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 $4.80 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

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—$14 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)	21,600	June (budget)	51,600
February (actual)	27,600	July (budget)	31,600
March (actual)	41,600	August (budget)	29,600
April (budget)	66,600	September (budget)	26,600
May (budget)	101,600

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 $4.80 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	$	280,000
Rent	$	26,000
Salaries	$	122,000
Utilities	$	11,000
Insurance	$	3,800
Depreciation	$	22,000

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

The company plans to purchase $20,000 in new equipment during May and $48,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,000 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	$	82,000
Accounts receivable ($38,640 February sales; $465,920 March sales)		504,560
Inventory		127,872
Prepaid insurance		25,000
Property and equipment (net)		1,030,000
Total assets	$	1,769,432
Liabilities and Stockholders’ Equity
Accounts payable	$	108,000
Dividends payable		21,000
Common stock		960,000
Retained earnings		680,432
Total liabilities and stockholders’ equity	$	1,769,432

The company maintains a minimum cash balance of $58,000. 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 $58,000 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 $58,000.

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.

4

% of sales

Fixed:

Advertising

$

280,000

Rent

$

26,000

Salaries

$

122,000

Utilities

$

11,000

Insurance

$

3,800

Depreciation

$

22,000

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

The company plans to purchase $20,000 in new equipment during May and $48,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,000 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

$

82,000

Accounts receivable ($38,640 February sales; $465,920 March sales)

504,560

Inventory

127,872

Prepaid insurance

25,000

Property and equipment (net)

1,030,000

Total assets

$

1,769,432

Liabilities and Stockholders’ Equity

Accounts payable

$

108,000

Dividends payable

21,000

Common stock

960,000

Retained earnings

680,432

Total liabilities and stockholders’ equity

$

1,769,432

The company maintains a minimum cash balance of $58,000. 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 $58,000 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 $58,000.

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.

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 $4.80 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 $ 280,000 Rent $ 26,000 Salaries $ 122,000 Utilities $ 11,000 Insurance $ 3,800 Depreciation $ 22,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $20,000 in new equipment during May and $48,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,000 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 $ 82,000 Accounts receivable ($38,640 February sales; $465,920 March sales) 504,560 Inventory 127,872 Prepaid insurance 25,000 Property and equipment (net) 1,030,000 Total assets $ 1,769,432 Liabilities and Stockholders’ Equity Accounts payable $ 108,000 Dividends payable 21,000 Common stock 960,000 Retained earnings 680,432 Total liabilities and stockholders’ equity $ 1,769,432 The company maintains a minimum cash balance of $58,000. 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 $58,000 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 $58,000. 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

	Mothers day
1	Sales budget	April	May	June	Quarter
	Sales	932400	1422400	722400	3077200
2	Budgeted Cash receipt	April	May	June	Quarter
	February sales	38640			38640
	March sale	407680	58240		465920
	April sales	186480	652680	93240	932400
	May sales		284480	995680	1280160
	June sales			144480	144480
	Total collection	632800	995400	1233400	2861600
3	Production budget	April	May	June	Total
	Sales in units	66,600	1,01,600	51,600	2,19,800
	Add ending inventory	40,640	20,640	12,640	12,640
	Inventory needed	1,07,240	1,22,240	64,240	2,32,440
	Less beginning inventory	26,640	40,640	20,640	26,640
	Required Purchase	80,600	81,600	43,600	2,05,800
	Cost of purchase @4.8 per unit	386880	391680	209280	823200
4	Cash Disbursement	April	May	June	Total
	March purchase	108000			108000
	April purchase	193440	193440		386880
	May purchase		195840	195840	391680
	June purchase			104640	104640
	Total disbursements	301440	389280	300480	991200