Question

The company sells many styles of earrings, but all are sold for the same price—$19 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)	24,000	June (budget)	54,000
February (actual)	30,000	July (budget)	34,000
March (actual)	44,000	August (budget)	32,000
April (budget)	69,000	September (budget)	29,000
May (budget)	104,000

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 $6.00 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	$	400,000
Rent	$	38,000
Salaries	$	146,000
Utilities	$	17,000
Insurance	$	5,000
Depreciation	$	34,000

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

The company plans to purchase $26,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $30,000 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	$	94,000
Accounts receivable ($57,000 February sales; $668,800 March sales)		725,800
Inventory		165,600
Prepaid insurance		31,000
Property and equipment (net)		1,150,000
Total assets	$	2,166,400
Liabilities and Stockholders’ Equity
Accounts payable	$	120,000
Dividends payable		30,000
Common stock		1,200,000
Retained earnings		816,400
Total liabilities and stockholders’ equity	$	2,166,400

The company maintains a minimum cash balance of $70,000. 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 $70,000 in cash.

Required: (ONLY NEED HELP ON 2, 3 & 4)

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 $70,000.

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
	Sales Budget
Months	April	May	June	Quarter
Budgeted unit sales	69000	104000	54000	227000
Selling Price Per unit	$                                                        19.00	$                 19.00	$                19.00	$                19.00
Total sales	$                                          1,311,000.00	$   1,976,000.00	$ 1,026,000.00	$ 4,313,000.00
	Schedule of expected cash collections
	Months Sales	April	May	June	Quarter
February sales=(30000*$19)*10% in April	$                                             570,000.00	$         57,000.00			$       57,000.00
March Sales=(44000*$19)*70% in April and (44000*$19)*10% in May	$                                             836,000.00	$       585,200.00	$       83,600.00		$     668,800.00
April sales=($1311000*20%) in April,($1311000*70%) in May and ($1311000*10%) in June	$                                          1,311,000.00	$       262,200.00	$     917,700.00	$      131,100.00	$ 1,311,000.00
May sales=($1976000)*20% in May and ($1976000*70% ) in June	$                                          1,976,000.00		$     395,200.00	$ 1,383,200.00	$ 1,778,400.00
June Sales=($1026000*20%) in June	$                                          1,026,000.00			$      205,200.00	$     205,200.00
Total Cash collections	$                                          5,719,000.00	$       904,400.00	$ 1,396,500.00	$ 1,719,500.00	$ 4,020,400.00
Merchandise Purchase Budget
	April	May	June	Quarter
Budgeted Unit Sales	69000	104000	54000	227000
Add:Ending Inventory=(104000*40%) in April,(54000*40% in May),(34000*40%) in June	41600	21600	13600	13600
Total Needs	110600	125600	67600	240600
Less: Opening Inventory=($165600/6) in April	27600	41600	21600	27600
Required Purchases	83000	84000	46000	213000
Cost of Purchase Per Unit	$                                                          6.00	$                    6.00	$                  6.00	$                   6.00
Total Cost of Purchase	$                                             498,000.00	$       504,000.00	$     276,000.00	$ 1,278,000.00
Budgeted Cash disbursement of Mercendise Purchase
Months	April	May	June	Quarter
Accounts Payable	$                                             120,000.00			$      120,000.00
April=($498000*50%) in April,($498000*50%) in May	$                                             249,000.00	$       249,000.00		$      498,000.00
May=($504000*50%) in May an ($504000*50%) in June		$       252,000.00	$     252,000.00	$      504,000.00
June=($276000*50%) in June			$     138,000.00	$      138,000.00
Total Cash Payments	$                                             369,000.00	$       501,000.00	$     390,000.00	$ 1,260,000.00
	Earrings Unlimited Cash Budget
	For the three months ending June 30th
Months	April	May	June	Quarter
Cash Balance	$                                                94,000.00	$         85,960.00	$     275,420.00	$        94,000.00
Add: Collections from customer	$                                             904,400.00	$   1,396,500.00	$ 1,719,500.00	$ 4,020,400.00
Total Cash available	$                                             998,400.00	$   1,482,460.00	$ 1,994,920.00	$ 4,114,400.00
Less: Disbursement
Mercendise Purchase	$                                             369,000.00	$       501,000.00	$     390,000.00	$ 1,260,000.00
Advertisement	$                                             400,000.00	$       400,000.00	$     400,000.00	$ 1,200,000.00
Rent	$                                                38,000.00	$         38,000.00	$       38,000.00	$      114,000.00
Salaries	$                                             146,000.00	$       146,000.00	$     146,000.00	$      438,000.00
Commissions=($1311000*4%) in April,($1976000*4%) in May and ($1026000*4%) in June	$                                                52,440.00	$         79,040.00	$       41,040.00	$      172,520.00
Utilities	$                                                17,000.00	$         17,000.00	$       17,000.00	$        51,000.00
Equipment Purchase		$         26,000.00	$       60,000.00	$        86,000.00
Dividend Paid	$                                                30,000.00			$        30,000.00
Total Disbursemnts	$                                          1,052,440.00	$   1,207,040.00	$ 1,092,040.00	$ 3,351,520.00
Excess/Deficiency of receipts over	$                                             (54,040.00)	$       275,420.00	$     902,880.00	$      762,880.00
disbursements
Financing:
Borrowings	$                                             140,000.00			$      140,000.00
Repayments			$   (140,000.00)	$   (140,000.00)
Interest=(140000*1%*3)			$       (4,200.00)	$        (4,200.00)
Total Financing	$                                             140,000.00		$   (144,200.00)	$        (4,200.00)
Cash Balance ,ending	$                                                85,960.00	$       275,420.00	$     758,680.00	$      758,680.00
	Earrings Unlimited
	Budgeted Income Statement
	For the three months ended June 30th
Sales		$   4,313,000.00	$ 4,313,000.00
Variable Expenes
Cost of goods sold=($165600+$1278000-13600*6)		$   1,362,000.00
Commission		$       172,520.00	$ 1,534,520.00
Contribution Margin			$ 2,778,480.00
Fixed Expenses
Advertising		$   1,200,000.00
Rent		$       114,000.00
Salaries		$       438,000.00
Utilities		$         51,000.00
Insurance		$           5,000.00
Depreciation=($34000*3)		$       102,000.00	$ 1,910,000.00
Net Operating Income			$     868,480.00
Interest Expense			$       (4,200.00)
Net Income			$     864,280.00
	Earrings Unlimited
	Budgeted Balance Sheet
	June 30th
	Assets
	Cash	$       758,680.00
	Accounts Receivable	$   1,018,400.00
	Inventory=(13600*$6)	$         81,600.00
	Prepaid insurance=($31000-$5000)	$         26,000.00
	Property & Equipment ,net=(1150000+26000+60000-102000)	$   1,134,000.00
	Total Assets	$   3,018,680.00
	Liabilities and stockholder's equity
	Accounts Payable	$       138,000.00
	Dividend Payable	$         30,000.00
	Capital Stock	$   1,200,000.00
	Retained Earning	$   1,650,680.00
	Total Liabilities and stockholder's equity	$   3,018,680.00
Cost of goods sold=Opening stock+Purchases-Closing stock
Accounts Receivable
May sales	1976000*10%	$       197,600.00
June sales	1026000*80%	$       820,800.00
Total		$   1,018,400.00
Retained Earnings at june 30th
Balance on March 31st	$                                             816,400.00
Add: Net Income	$                                             864,280.00
Total	$                                          1,680,680.00
Less: Dividend declared	$                                                30,000.00
Balance on June 30th	$                                          1,650,680.00