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 comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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—$11 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) 20,200 June (budget) 50,200 February (actual) 26,200 July (budget) 30,200 March (actual) 40,200 August (budget) 28,200 April (budget) 65,200 September (budget) 25,200 May (budget) 100,200 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 $4.1 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, with no discount, and payable within 15 days. The company has found, however, that 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 $ 210,000 Rent $ 19,000 Salaries $ 108,000 Utilities $ 7,500 Insurance $ 3,100 Depreciation $ 15,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,500 in new equipment during May and $41,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,750 each quarter, payable in the first month of the following quarter. A listing of the company’s ledger accounts as of March 31 is given below: Assets Cash $ 75,000 Accounts receivable ($28,820 February sales;$353,760 March sales) 382,580 Inventory 106,928 Prepaid insurance 21,500 Property and equipment (net) 960,000 Total assets $ 1,546,008 Liabilities and Stockholders’ Equity Accounts payable $ 101,000 Dividends payable 15,750 Common stock 820,000 Retained earnings 609,258 Total liabilities and stockholders’ equity $ 1,546,008 The company maintains a minimum cash balance of $51,000. 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 $51,000 in cash. Required: 1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: a. A sales budget, by month and in total.

Answer 1

(a) Sales Budget
	April	May	June	Total
Budgeted Sales - units	65200	100200	50200	215600
Selling Price per unit	11	11	11	11
Budgeted Sales	717200	1102200	552200	2371600
(b)   Schedule of cash receipts
	April	May	June	Total
Credit Sales
February sales (10% in April)	28820			28820
March Sales (70% in april, 10% in May)	309540	44220		353760
April Sales	143440	502040	71720	717200
May Sales		220440	771540	991980
June Sales			110440	110440
Total Collections	481800	766700	953700	2202200
Receivables	617980	953480	551980	551980
(c) Inventory Purchase Budget
	April	May	June	Total
Budgeted sales units	65200	100200	50200	215600
Add: Desired ending inventory	40080	20080	12080	12080
(40% of next month's unit sales)
Total goods neded	105280	120280	62280	227680
Less: Beginning inventory	26080	40080	20080	26080
Budgeted purchase units	79200	80200	42200	201600
Cost per unit of inventory ($)	4.1	4.1	4.1	4.1
Total cost of purchases	324720	328820	173020	826560
(d) Cash payment budget for purchases
	April	May	June	Total
Budgeted Purchases	324720	328820	173020	826560
Payments:
March purchases	101000			101000
April purchases	162360	162360		324720
May purchases		164410	164410	328820
June purchases			86510	86510
Total payments	263360	326770	250920	841050
Accounts Payable	162360	164410	86510	86510
(e) Operating expenses budget
	April	May	June	Total
Sales commission(4% of sales)	28688	44088	22088	94864
Advertising expense	210000	210000	210000	630000
Rent expense	19000	19000	19000	57000
Salaries expense	108000	108000	108000	324000
Utilities expense	7500	7500	7500	22500
Insurance expense	3100	3100	3100	9300
Depreciation expense	15000	15000	15000	45000
Total operating expense	391288	406688	384688	1182664
Schedule of cash payments for operating expenses
	April	May	June	Total
Sales commission(4% of sales)	28688	44088	22088	94864
Advertising expense	210000	210000	210000	630000
Rent expense	19000	19000	19000	57000
Salaries expense	108000	108000	108000	324000
Utilities expense	7500	7500	7500	22500
Cash payment for operating expense	373188	388588	366588	1128364
EARRINGS LIMITED
Cash Budget
	April	May	June	Total
Beginning Balance	75000	50502	50344	75000
Add: Cash receipts	481800	766700	953700	2202200
Cash available for disbursements	556800	817202	1004044	2277200
Less: Payments
for purchase of inventory	263360	326770	250920	841050
For operating expenses	373188	388588	366588	1128364
for purchase of equipment		16500	41000	57500
For dividend	15750			15750
for interest			4030	4030
Total payments	652298	731858	662538	2046694
Receipts minus payments	-95498	85344	341506	230506
Minimum cash balance	51000	51000	51000	51000
Excess / (Shortage)	-146498	34344	290506	179506
Financing activitiy
Borrowing / (Repayments)	146000	-35000		111000
Repayments			-111000	-111000
Total Financing	146000	-35000	-111000	0
Ending cash balance	50502	50344	230506	230506
EARRINGS LIMITED
Contribution margin income statement
For the quarter ending June 30
Sales Revenue		2371600
Variable expenses:
Cost of goods sold	883960
Sales commission	94864
Total variable expenses		978824
Contribution margin		1392776
Fixed expenses:
Advertising expense	630000
Rent expense	57000
Salaries expense	324000
Utilities expense	22500
Insurance expense	9300
Depreciation expense	45000
total operating expenses		1087800
Net operating income		304976
Interest expense		4030
Net income		300946
EARRINGS LIMITED
Budgeted Balance sheet
as at June 30
Assets
Cash		230506
Accounts Receivable		551980
Inventory		49528
Prepaid insurance		12200
Property and equipment , net
Beginning balance, net	960000
Add: Purchases	57500
	1017500
Less: Depreciation	45000	972500
Total Assets		1816714
Liabilities and owners' equity
Accounts Payable		86510
Dividend Payable		15750
Total liabilities		102260
Capital stock		820000
Retained earnings
Balance as at April 1	609258
Net income	300946
	910204
Dividends	15750	894454
Total Liabilities and equity		1816714