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

Februrary (actual) 26,200

March (actual) 40,200

April (budget) 65,200

May (budget) 100,200

June (budget) 50,200

July (budget) 30,200

August (budget) 28,200

September (budget) 25,200

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:

1. Budget assumptions for the year

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 $51,000

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

Answer a
Sales Budget
	April	May	June	Total
Sales in Units	65,200	100,200	50,200	215,600
Sp Per Unit	11	11	11	11
Total Sales in $	717,200	1,102,200	552,200	2,371,600
Answer b
Schedule of Expected Cash Collections from Sales
	April	May	June	Total
Collection from Accounts Receivables
Feb Sales	28,820			28,820
March Sales	309,540	44,220	-	353,760
April Sales	143,440	502,040	71,720	717,200
May Sales		220,440	771,540	991,980
June Sales Sales			110,440	110,440
Total cash Collections	481,800	766,700	953,700	2,202,200
Answer c
Merchandise Purchase Budget
	April	May	June	Total
Sales In units	65,200	100,200	50,200	215,600
Add: Closing Inventory in units	40,080	20,080	12,080	12,080
Total Needs	105,280	120,280	62,280	227,680
Less: opening Inventory in units	(26,080)	(40,080)	(20,080)	26,080
Required Purchases in Units	79,200	80,200	42,200	253,760
Price per paid of Earings	4.10	4.10	4.10	4.10
Total Purchases in $	324,720	328,820	173,020	826,560
Answer d
Schedule of Cash payments to Suppliers
	April	May	June	Total
Cash Payment
Accounts Payable - March	101,000			101,000
April Purchases	162,360	162,360		324,720
May Purchases		164,410	164,410	328,820
June Purchases			86,510	86,510
Total Cash Payment to Suppliers	263,360	326,770	250,920	841,050
Answer e
Selling & Admn. Budget
	April	May	June	Total
Sales Comm. - 4%	28,688	44,088	22,088	94,864
Fixed
Advt.	210,000	210,000	210,000	630,000
Rent (Fixed)	19,000	19,000	19,000	57,000
Salary Expense	108,000	108,000	108,000	324,000
Utilities	7,500	7,500	7,500	22,500
Insurance	3,100	3,100	3,100	9,300
Dep.	15,000	15,000	15,000	45,000
Total	391,288	406,688	384,688	1,182,664
Schedule of Cash payments of Selling & Admn. Budget
	April	May	June	Total
Sales Comm. - 4%	28,688	44,088	22,088	94,864
Fixed
Advt.	210,000	210,000	210,000	630,000
Rent (Fixed)	19,000	19,000	19,000	57,000
Salary Expense	108,000	108,000	108,000	324,000
Utilities	7,500	7,500	7,500	22,500
Total	373,188	388,588	366,588	1,128,364
Cash budget
	April	May	June	Total
Opening cash Balance	75,000	51,502	86,344	75,000
Add: receipts
Collection from Customers	481,800	766,700	953,700	2,202,200
Total Cash available	556,800	818,202	1,040,044	2,277,200
Less: Disbursements
Cash Disbursement - Accounts Payable	263,360	326,770	250,920	841,050
Selling & Admn. Exp.	373,188	388,588	366,588	1,128,364
Purchase of Equipment	-	16,500	41,000	57,500
Dividend Paid	15,750	-	-	15,750
Total Disbursement	652,298	731,858	658,508	2,042,664
Cash Balance Closing	(95,498)	86,344	381,536	234,536
Add: Finance from Bank	147,000	-		147,000
Less: Payment to Bank	-		(147,000)	(147,000)
Less: Payment of interet - Bank loan	-		(4,410)	(4,410)
Net Cash Balance Closing	51,502	86,344	230,126	230,126
Income Statement
For the Qtr Ending June 30
Sales		2,371,600
Less: Variable Cost
Cost of Goods Sold	883,960
Sales Comm. - 4 % of Sales	94,864	978,824
Contribution		1,392,776
Less: Fixed Cost
Advt.	630,000
Rent (Fixed)	57,000
Salary Expense	324,000
Utilities	22,500
Insurance	9,300
Dep.	45,000	1,087,800
Operating Profit		304,976
Less: Interest Expenses		4,410
Net Income		300,566
Balance Sheet
As on June 30
Assets
Current Assets
Cash	230,126
Accounts receivables	551,980
Prepaid Insurance	12,200
Inventory	49,528	843,834
Fixed Assets
Property & Equipment	1,017,500
Less: Dep.	(45,000)	972,500
Total Assets		1,816,334
Liabilities
Accounts Payable	86,510
Dividends Payable	15,750
Total liabilities		102,260
Shareholders's Equity
Common Stock	820,000
Retained Earnings	894,074
Total Stockholders equity		1,714,074
Total liabilities & Stockholders' Equity		1,816,334		-
Schedule of Retained Earnings
As on June 30
Opening Balance		609,258
Add: net income		300,566
Less: Dividend declared		(15,750)
Closing Balance		894,074