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—$20 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)	23,200	June (budget)	53,200
February (actual)	29,200	July (budget)	33,200
March (actual)	43,200	August (budget)	31,200
April (budget)	68,200	September (budget)	28,200
May (budget)	103,200

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 $5.60 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	$	360,000
Rent	$	34,000
Salaries	$	138,000
Utilities	$	15,000
Insurance	$	4,600
Depreciation	$	30,000

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

The company plans to purchase $24,000 in new equipment during May and $56,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,000 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	$	90,000
Accounts receivable ($58,400 February sales; $691,200 March sales)		749,600
Inventory		152,768
Prepaid insurance		29,000
Property and equipment (net)		1,110,000
Total assets	$	2,131,368
Liabilities and Stockholders’ Equity
Accounts payable	$	116,000
Dividends payable		27,000
Common stock		1,120,000
Retained earnings		868,368
Total liabilities and stockholders’ equity	$	2,131,368

The company maintains a minimum cash balance of $66,000. 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 $66,000 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 $66,000.

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

Sales Budget
	April	May	June	Total
Sales Units	68,200	103,200	53,200	224,600
Sale price per Unit	20	20	20	20
Total Expected Sales	1,364,000	2,064,000	1,064,000	4,492,000

Schedule of expected cash collections
	April	May	June	Total
Collection from Accounts Receivable	$        663,200	$              86,400		$            749,600
Collection from April Sale(20:70:10)	$        272,800	$            954,800	$        136,400	$        1,364,000
Collection from may Sale((20:70:10)		$            412,800	$     1,444,800	$        1,857,600
Collection from June Sale(20:70:10)			$        212,800	$            212,800
Expected cash collections	$        936,000	$        1,454,000	$     1,794,000	$        4,184,000

Merchandise purchases budget
	April	May	June	Total
Sales Units	68,200	103,200	53,200	224,600
Ending inventory(40% of Next Month Sale)	41,280	21,280	13,280	13,280
Begning Inventory	27,280	41,280	21,280	27,280
Merchandise purchases Units	82,200	83,200	45,200	210,600
Purchase price per Unit	$               5.60	$                   5.60	$               5.60	$                   5.60
Merchandise purchases*	$        460,320	$            465,920	$        253,120	$        1,179,360

Schedule of expected cash disbursements for Merchandise Purchases
	April	May	June	Total
Payment in Month of Purchase(50%)	$        230,160	$            232,960	$        126,560	$            589,680
Payment in Last Month Purchase(50%)	$        116,000	$            230,160	$        232,960	$            579,120
Expected cash disbursements	$        346,160	$            463,120	$        359,520	$        1,168,800

Cash Budget
	April	May	June	Total
Beginning Cash Balance	$           90,000	$              66,280	$        403,600	$              90,000
Expected cash collections	$        936,000	$        1,454,000	$     1,794,000	$        4,184,000
Total Cash Availabe	$     1,026,000	$        1,520,280	$     2,197,600	$        4,274,000
Payments:
Merchandise Purchases	$        346,160	$            463,120	$        359,520	$        1,168,800
Sales Commission	$           54,560	$              82,560	$           42,560	$            179,680
Advertising	360,000.00	360,000.00	360,000.00	$        1,080,000
Rent	34,000.00	34,000.00	34,000.00	$            102,000
Salaries	138,000.00	138,000.00	138,000.00	$            414,000
Utilities	15,000.00	15,000.00	15,000.00	$              45,000
Equipment Purchase		24,000.00	$           56,000	$              80,000
Dividend	27,000.00			$              27,000
Total Expected disbursements	974,720.00	1,116,680.00	1,005,080.00	3,096,480.00
Shortage/Excess	51,280.00	403,600.00	1,192,520.00	$        1,177,520
Borrowings	15,000.00	-	-	$              15,000
Interest	-	-	(300.00)	$                  (300)
Repayment	-	-	(15,000.00)	$            (15,000)
Ending Cash Balance	66,280.00	403,600.00	1,192,220.00	1,177,220.00

Income statement for the quarter ended September 30
Sales		$       4,492,000
Less: Variable Cost of Goods Sold		$       1,257,760
Less: Variable Selling expesnes		$           179,680
Contribution		$       3,054,560
Fixed Expesnes:
Advertising	$        1,080,000
Rent	$            102,000
Salaries	$            414,000
Utilities	$              45,000
Insurance	$              13,800
Interest Expesnes	$                    300
Depreciation	$              90,000
Total Fixed Expesnes		$       1,745,100
Net Operating Income		$       1,309,460

Balance Sheet as on June 30
Assets
Cash	$      1,177,220
Accounts receivable	1,057,600
Inventory	74,368
Prepaid insurance	15,200
Plant and equipment, net of depreciation	1,100,000
Total assets	3,424,388
Liabilities and Stockholders’ Equity
Accounts payable	$         126,560
Dividend payable	27,000
Common stock	1,120,000
Retained earnings	2,150,828
Total liabilities and stockholders’ equity	3,424,388

Cost of Goods Sold
Begning Inventory in Units	$           27,280
Purchase in Units	$        210,600
Ending Inventory Units	$           13,280
Units Sold	$        224,600
Cost per Unit	$               5.60
Cost of Goods Sold	$     1,257,760

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