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—$11 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)	20,200	June (budget)	50,200
February (actual)	26,200	July (budget)	30,200
March (actual)	40,200	August (budget)	28,200
April (budget)	65,200	September (budget)	25,200
May (budget)	100,200

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 $4.10 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	$	210,000
Rent	$	19,000
Salaries	$	108,000
Utilities	$	7,500
Insurance	$	3,100
Depreciation	$	15,000

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

The company plans to purchase $16,500 in new equipment during May and $41,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,750 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	$	75,000
Accounts receivable ($28,820 February sales; $353,760 March sales)		382,580
Inventory		106,928
Prepaid insurance		21,500
Property and equipment (net)		960,000
Total assets	$	1,546,008
Liabilities and Stockholders’ Equity
Accounts payable	$	101,000
Dividends payable		15,750
Common stock		820,000
Retained earnings		609,258
Total liabilities and stockholders’ equity	$	1,546,008

The company maintains a minimum cash balance of $51,000. 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 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 while still retaining at least $51,000 in cash.

Required:

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

Budget assumptions for the year.

A sales budget, by month and in total.

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

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

            total.

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

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 $51,000.

A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

A budgeted balance sheet as of June 30.

Answer 1

Sales Budget
Particulars	January	February	March	April	May	June	July	August	September	Total
Sales (Pairs)	20200	26200	40200	65200	100200	50200	30200	28200	25200	385800
× Price Per Pair	11	11	11	11	11	11	11	11	11	11
Sales Value $	222200	288200	442200	717200	1102200	552200	332200	310200	277200	4243800

	Schedule of expected Cash Collections
	Particulars	January	February	March	April	May	June	July	August	September	Total
	Sales Value	222200	288200	442200	717200	1102200	552200	332200	310200	277200	4243800
A	Collected in month of Sales (20% of sales)	44440	57640	88440	143440	220440	110440	66440	62040	55440	848760
B	Addition 70% collection	-	155540	201740	309540	502040	771540	386540	232540	217140	2776620
C	Remaining 10% collection	-	-	22220	28820	44220	71720	110220	55220	33220	365640
D	Total (A+B+C) $	44440	213180	312400	481800	766700	953700	563200	349800	305800	3991020

Merchandise Purchase Budget
Particulars	January	February	March	April	May	June	July	August	September	Total
Sales (Units )	20200	26200	40200	65200	100200	50200	30200	28200	25200	385800
Closing Stock (Units)	10480	16080	26080	40080	20080	12080	11280	10080	154320	300560
Opening Stock (units)	0	10480	16080	26080	40080	20080	12080	11280	10080	146240
										0
Purchase (Units)	30680	31800	50200	79200	80200	42200	29400	27000	169440	540120
Purchase price per earrings/units	4.1	4.1	4.1	4.1	4.1	4.1	4.1	4.1	4.1
Total Purchase Value ($)	125788	130380	205820	324720	328820	173020	120540	110700	694704	2214492

A schedule of expected cash disbursements for merchandise purchases
Particulars	January	February	March	April	May	June	July	August	September	Total
Total Purchase Value ($)	125788	130380	205820	324720	328820	173020	120540	110700	694704	2214492
Cash Disbursements
50% same month	62894	65190	102910	162360	164410	86510	60270	55350	347352	1107246
50% next month	0	62894	65190	102910	162360	164410	86510	60270	55350	759894
Total in $	62894	128084	168100	265270	326770	250920	146780	115620	402702	1867140

	Cash Budget ($)
	Particulars	April	May	June	July	August	September	Total
	Opening Cash Balance	75000	51000	51000	51000	51000	51000	330000
+	Cash Collections (sales)	481800	766700	953700	563200	349800	305800	3421000
-	Cash Disbursements (Purch.)	265270	326770	250920	146780	115620	402702	1508062
-	New equipment	0	16500	41000	0	0	0	57500
-	Dividend	15750	0	0	15750	0	0	31500
-	Sales commission @ 4% on sales	28688	44088	22088	13288	12408	11088	131648
-	Advertizing	210000	210000	210000	210000	210000	210000	1260000
-	Salaries	19000	19000	19000	19000	19000	19000	114000
-	Interest @ 1 on borrowing (balance)	0	1484	1151	0	0	217	2852
-	Rent	108000	108000	108000	108000	108000	108000	648000
-	Utilities	7500	7500	7500	7500	7500	7500	45000
		-97408	84358	345041	93882	-71728	-401707	-47562
	Closing Balance	51000	51000	51000	51000	51000	51000	306000
	Borrowing	148408	0	0		21728	452707	622843
	Repayment	0	33358	115050	0	0	0	148408
	Balance of borrowing	148408	115050	0	0	21728	474435	759621

Budgeted Income Statement ($)
Particulars	April	May	June
Sales	717200	1102200	552200
Variable Exp.
COST of Purchase	324720	328820	173020
Variable selling exp. @ 4%	28688	44088	22088
Interest on borrowing	0	1484	1151
Contribution (A)	363792	727808	355941
Fixed EXP.
Advertizing	210000	210000	210000
Salaries	19000	19000	19000
Rent	108000	108000	108000
Utilities	7500	7500	7500
Depreciation	15000	15000	15000
TOTAL FIXED EXP. (B)	359500	359500	359500
NET (A-B)	4292	368308	-3559

BUDGETED BALANCE SHEET AS OF 30 JUNE
CASH	51000
ACCOUNT RECEIVABLE	541200
INVENTORY (98320×4.1)	403112
PREPAID INSURANCE	21500
PROPERTY & EQUIPMENT (NET)	972500
{960000+16500+41000-(15000×3)}
ACCOUNTS PAYABLE	187510
DIVIDEND PAYABLE	47250
COMMON STOCK	820000
RETAINED EARNINGS	978299
(609258+4292+368308-3559)