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—$16 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)	23,400	June (budget)	53,400
February (actual)	29,400	July (budget)	33,400
March (actual)	43,400	August (budget)	31,400
April (budget)	68,400	September (budget)	28,400
May (budget)	103,400

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 $5.70 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	$	370,000
Rent	$	35,000
Salaries	$	140,000
Utilities	$	15,500
Insurance	$	4,700
Depreciation	$	31,000

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

The company plans to purchase $24,500 in new equipment during May and $57,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,750 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	$	91,000
Accounts receivable ($47,040 February sales; $555,520 March sales)		602,560
Inventory		155,952
Prepaid insurance		29,500
Property and equipment (net)		1,120,000
Total assets	$	1,999,012
Liabilities and Stockholders’ Equity
Accounts payable	$	117,000
Dividends payable		27,750
Common stock		1,140,000
Retained earnings		714,262
Total liabilities and stockholders’ equity	$	1,999,012

The company maintains a minimum cash balance of $67,000. 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 $67,000 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 $67,000.

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

	Earrings Unlimited
Requirement
1-a	Monthly Sales Budgets			April	May	June	2nd Quarter
	Sales in units			68400	103400	53400	225200
	Sales price			16	16	16
	Sales Revenue in			1094400	1654400	854400	3603200
1-b	Monthly Mechandise Purchase Budgets			April	May	June	2nd Quarter
	Sales in units			68400	103400	53400	225200
	Plus Desired ending inventory			41360	21360	13360	21000
	Total needed			109760	124760	66760	246200
	Less Beginning Inventory			27360	41360	21360	16000
	Number of units to produce			82400	83400	45400	211200
	Purchase price of each pair of earrings			5.7	5.7	5.7	5.7
	Purchase Value			469680	475380	258780	1203840
1-c	Calculation of cash receipts from customers
	Monthly Sales Budgets			April	May	June	2nd Quarter
	Sales Revenue in			1094400	1654400	854400	3603200
	Credit sales from
	Credit sales made in the same month			218880	330880	170880	720640
	Credit sales made one month ago			486080	766080	1158080	2410240
	Credit sales made two month ago			47040	69440	109440	225920
	Total cash collection			752000	1166400	1438400	3356800
1-d	Calculation of payment to suppliers
				April	May	June	2nd Quarter
	Total cost of purchases			469680	475380	258780	1203840
	Cash Payment for current month's purchases			234840	237690	129390	601920
	Cash Payment for prior month's purchases			117000	234840	237690	589530
	Total Cash payment			351840	472530	367080	1191450
2	Cash Budget
				April	May	June	2nd Quarter
		Beginning Balance		91000	67134	109828	91000
		Cash receipts from customers		752000	1166400	1438400	3356800
		Total cash available		843000	1233534	1548228	3447800
		Cash payments
		Disbursement to suppliers in cash		351840	472530	367080	1191450
		Dividends		27750			27750
		Equipement purchase			24500	57000	81500
		Variable Sales commissions		43776	66176	34176	144128
		Fixed cash operating Income		560500	560500	560500	1681500
		Total cash payments		983866	1123706	1018756	3126328
		Surplus/(Deficiet)		-140866	109828	529472	321472
		Minimum Cash balance required		67000	67000	67000	67000
		Borrowing(Repayment) of Loan		208000	0	-208000	0
		Interest paid				6240	6240
		Ending Cash balance		67134	109828	315232	315232