Question

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earring 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- $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 are 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
Capital 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.

Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

Required
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

1. a. A sales budget, by month and in total
    b. A schedule of expected cash collections from sales, 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

1.

a. Sales Budget

	April	May	June	Total
Sales units	69,000	104,000	54000	227,000
Unit price	$19	$19	$19	$19
Sales	$1,311,000	$1,976,000	$1,026,000	$4,313,000

b. Schedule of expected cash collections

	April	May	June	Total
Collections from the sales of month:
February sales -$570,000	$57,000			$57,000
March sales - $836,000	585,200	$83,600		668,800
April sales	262,200	917,700	$131,100	1,311,000
May		395,200	1,383,200	1,778,400
June			205,200	205,200
Total	$904,400	$1,396,500	$1,719,500	$4,020,400

c. Merchandise purchases budget in units and in dollars

	April	May	June	Total
Sales	69,000	104,000	54,000	227,000
Add ending inventory(40% of next month sales)	41,600	21,600	13,600	76,800
	110,600	125,600	67,600	303,800
Less beginning inventory	(27,600)	(41,600)	(21,600)	(90,800)
Required purchases in units	83,000	84,000	46,000	213,000
Unit price	$6	$6	$6	$6
Purchases in dollars	$498,000	$504,000	$276,000	$1,278,000

d. Schedule of expected cash disbursements for merchandise purchases

	April	May	June	Total
Payment for the purchases of month:
March	$120,000			$120,000
April	249,000	$249,000		498,000
May		252,000	$252,000	504,000
June			138,000	138,000
Total	$369,000	$501,000	$390,000	$1,260,000

2.

Cash budget

	April	May	June	Total
Beginning balance	$94,000	$70,960	$134,170	299,130
Collections from sales	904,400	1,396,500	1,719,500	4,020,400
Total cash available	$998,400	$1,467,460	1,853,670	4,319,530
Cash disbursements:
Purchases	369,000	501,000	390,000	1,260,000
Sales Commission ( 4% of sales)	52,440	79,040	41,040	172,520
For Fixed expenses (advertisement,rent, salaries, utilities)	601,000	601,000	601,000	1,803,000
For equipment purchases		26,000	60,000	86,000
For dividends	30,000			30,000
Total cash disbursements	$1,052,440	$1,207,040	$1,092,040	3,351,520
Excess / (deficiency) of receipts	$(54,040)	$260,420	$761,630	968,010
Financing:
Borrowing (1000× 125)	125,000			125,000
Repayments		(125,000)	-	(125,000)
Interest		(1,250)	-	(1,250)
Total financing	$125,000	(126,250)	-	(126,250)
Ending balance	$70,960	$134,170	$761,630	966,760