In: Accounting
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—$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.
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
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.
Cash Budget uptil June end | |||
Particulars | April | May | June |
Sales | 904400 | 1396500 | 1719500 |
Raw Material | -457800 | -573000 | -372000 |
Sales Commission | -52440 | -79040 | -41040 |
Advertising | -400000 | -400000 | -400000 |
Rent | -38000 | -38000 | -38000 |
Salaries | -146000 | -146000 | -146000 |
utilities | -17000 | -17000 | -17000 |
Depreciation(not a cash flow) |
|||
Equipment Purchased | -26000 | -60000 | |
Dividend of quarter
ended march |
-30000 | ||
Total Cash Flows (1) | -236840 | 117460 | 645460 |
Add- opening Bal (2) | 94000 | 70000 | 70000 |
equals to closing (1+2) | -142840 | 187460 | 715460 |
Therefore loan
requirement would be 142840+70000 since minimum cash bal of 70000is to be maintained and the cash flow for the month of april is negative 142840 |
212840 | Repay 187460-70000= 117460 -2128(1%interest)=115332 |
Repay the balance loan 212840-117460=95380-975(1%interest)=94405 |
Less - Interest | -2128 | -975 | |
Closing Bal | 70000 | 70000 | 620080 |
Working Note-
April= Sales were predicted to be 69000@ 19 so 69000*19=1311000 of which 20% would be received in the current month 70% in the next month and 10%following that
So therefore cash flows for the month of april are = 20%of current month 69000 + 70%of sales in march and 10% of sales in February. = 20%of 69000+ 70% of 44000 + 10% of 30000. = 13800+30800+3000= 47600units @ 19= 904400
Similarly for may = 20%of 104000+70% of 69000+10%44000= 20800+48300+4400=73500units@19=
1396500
June= 20%of 54000(june) + 70%of104000(may) + 10%69000(April)= 10800+72800+6900=90500units
90500units @19= 1719500.
Raw Material Requirement | |||||
March | April | May | June | July | |
Sales | 44000 | 69000 | 104000 | 54000 | 34000 |
Current month |
44000 | 69000 | 104000 | 54000 | |
40%of following month |
27600 | 41600 | 21600 | 13600 | |
Less- Opening 40%of last month |
-12000 | -17600 | -27600 | -41600 | |
Total (raw material requirement for the month) |
59600 | 93000 | 98000 | 26000 | |
at the rate $6 | 357600 | 558000 | 588000 | 156000 | |
Cash flow would be | |||||
Current month 50% | 279000 | 294000 | 78000 | ||
50% of last month | 178800 | 279000 | 294000 | ||
TOTAL | 457800 | 573000 | 372000 |
Sales Commisions | |||
Particulars | April | May | June |
Sales units | 69000 | 104000 | 54000 |
19$ *units | 1311000 | 1976000 | 1026000 |
4% Commission | 52440 | 79040 | 41040 |
Income uptil June end | |||
Particulars | April | May | June |
Sales | 1311000 | 1976000 | 1026000 |
Raw Material | -414000 | -624000 | -324000 |
Sales Commission | -52440 | -79040 | -41040 |
Advertising | -400000 | -400000 | -400000 |
Rent | -38000 | -38000 | -38000 |
Salaries | -146000 | -146000 | -146000 |
Insurance | -5000 | -5000 | -5000 |
utilities | -17000 | -17000 | -17000 |
Depreciation(not a cash flow) |
-34000 | -34000 | -34000 |
Interest | -2128 | -975 | |
Net Income$ | 204560 | 630832 | 19985 |