Question

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.

	Sales Budget April May June Quarter Budgeted unit sales Selling price per unit Total sales

    b. A schedule of expected cash collections, by month and in total.

	Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February sales $0 March sales 0 April sales 0 May sales 0 June sales 0 Total cash collections $0 $0 $0 $0

    c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

	Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted unit sales 0 Total needs 0 0 0 0 Required purchases 0 0 0 0 Unit cost Required dollar purchases $0 $0 $0 $0

    d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

	Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable $0 April purchases 0 May purchases 0 June purchases 0 Total cash payments $0 $0 $0 0

Answer 1

1-a) Sales Budget
	April	May	June	Quarter
Budgeted unit sales (a)	66,600	101,600	51,600	219,800
Selling price per unit (b)	$14	$14	$14	$14
Total sales (a * b)	$932,400	$1,422,400	$722,400	$3,077,200
b) Cash collections:
	April	May	June	Quarter
February sales (27,600*$14*10/100)	$38,640			$38,640
March sales (41,600*$14 = $582,400*70/100); ($582,400*10/100)	$407,680	$58,240		$465,920
April sales ($932,400*20/100); ($932,400*70/100); ($932,400*10/100)	$186,480	$652,680	$93,240	$932,400
May sales ($1,422,400*20/100); ($1,422,400*70/100)		$284,480	$995,680	$1,280,160
June sales ($722,400*20/100)			$144,480	$144,480
Total cash collections	$632,800	$995,400	$1,233,400	$2,861,600
c) Merchandise Purchase Budget:
	April	May	June	Quarter
Budgeted unit sales	66,600	101,600	51,600	219,800
Add: Desired ending inventory (101,600*40/100); (51,600*40/100); (31,600*40/100)	40,640	20,640	12,640	73,920
Total needs	107,240	122,240	64,240	293,720
Less: Beginning inventory (last month's ending inventory will be the beginnin inventory in the current month (66,600*40/100)	26,640	40,640	20,640	87,920
Required purchases (a)	80,600	81,600	43,600	205,800
Unit cost (b)	$4.80	$4.80	$4.80	$4.80
Required dollar purchases (a*b)	$386,880	$391,680	$209,280	$987,840
d) Cash disbursements:
	April	May	June	Quarter
Accounts payable	$108,000			$108,000
April purchases ($386,880*1/2); ($386,880*1/2)	$193,440	$193,440		$386,880
May purchases ($391,680*1/2); ($391,680*1/2)		$195,840	$195,840	$391,680
June purchases ($209,280*1/2)			$104,640	$104,640
Total cash payments	$301,440	$389,280	$300,480	$991,200