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—$15 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)	21,000	June (budget)	51,000
February (actual)	27,000	July (budget)	31,000
March (actual)	41,000	August (budget)	29,000
April (budget)	66,000	September (budget)	26,000
May (budget)	101,000

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 $4.50 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	$	250,000
Rent	$	23,000
Salaries	$	116,000
Utilities	$	9,500
Insurance	$	3,500
Depreciation	$	19,000

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

The company plans to purchase $18,500 in new equipment during May and $45,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $18,750 each quarter, payable in the first month of the following quarter.

Selected items from the company’s March 31 balance sheet are as follows:

Cash	$	79,000
Accounts receivable ($40,500 February sales; $492,000 March sales)		532,500
Inventory		118,800
Accounts payable		105,000
Dividends payable		18,750

The company maintains a minimum cash balance of $55,000. 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 $55,000 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 $55,000.

Answer 1

1A	Sales Budget:
	Particulars	April	May	June	Total
	Sales Budget In Units	66000	101000	51000	218000
	Sales Budget In Value	990000	1515000	765000	3270000
	Total	990000	1515000	765000	3270000
1B	Cash Collection Budget:
	Particulars	April	May	June	Total
	Sales on Account	990000	1515000	765000	3270000
	In the Month(20%)	198000	303000	153000	654000
	In the Following Sales Month(70%)	430500	693000	1060500	2184000
	In the Following Sales 2 Month(10%)	40500	61500	99000	201000
	Total Collections	669000	1057500	1312500	3039000
1C	Purchase Budget in Units & Value:
	Particulars	April	May	June	Total
	Sales in Units	66000	101000	51000	218000
	Add: Desired Closing Inventory	40400	20400	12400	12400
	Total Demand	106400	121400	63400	230400
	Less: Opening Inventory	26400	40400	20400	26400
	Purchase Budget in Units	80000	81000	43000	204000
	Purchase Budget in Value	360000	364500	193500	918000	(Purchase Units*4.50)
1D	Cash Disbursement for Purchase Budget:
	Particulars	April	May	June	Total
	Purchase Budget in Value	360000	364500	193500	918000
	In the Month(50%)	180000	182250	96750	459000
	In the Following Month(50%)	105000	180000	182250	467250
	Total Cash Disbursement for Purchases	285000	362250	279000	926250
2	Cash Budget:
	Particulars	April	May	June	Total
	Opening Cash Balance	79000	55150	272800	79000
	Add: Cash Collections	669000	1057500	1312500	3039000
	Total Avaiable Cash	748000	1112650	1585300	3118000
	Less: Cash Disbursement
	For Purchases	285000	362250	279000	926250
	SalesCommission(4% of Sales)	39600	60600	30600	130800
	Fixed Expenses Exl Dep	398500	398500	398500	1195500	Depreciation Excluded; Insurance Excluded
	Equipment		18500	45000	63500
	Dividend	18750			18750
	Total Cash Disbursement	741850	839850	753100	2334800
	Excess/(Deficit) Cash	6150	272800	832200	783200
	Add: Borrowings	49000			49000
	Less: Repayments			49000	49000
	Less: Interest			1470	1470	(49000*1%*3 Months)
	Closing Cash Balance	55150	272800	781730	781730