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—$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:

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.

Answer 1

a. A sales budget, by month and in total:
SALES BUDGET:
	April	May	June	Quarter
Budgeted unit sales	69,000	104,000	54,000	227,000
Selling price per unit	19	19	19	19
Total Sale	1,311,000	1,976,000	1,026,000	4,313,000
b. A schedule of expected cash collections, by month and in total. : SCHEDULE OF EXPECTED CASH COLLECTIONS: April May June Quarter Sales 20%              262,200       395,200        205,200            862,600 Sales 70%              585,200       917,700     1,383,200        2,886,100 Sales 10%                57,000          83,600        131,100            271,700 Total Cash Collection              904,400    1,396,500     1,719,500        4,020,400 Workings: March sales = (44,000*19 = 836000) *70% = 585,200 April sales = 1,311,000*70% = 917700 May Sales = 1,976,000*70%= 1,383,200 April sales = 1,311,000*10% = 131,100 March sales = (44,000*19 = 836000) *10% = 83,600 Feb Sales = (30,000*19= 570,000)*10%=57,000 MERCHANDISE PURCHASE BUDGET April May June Quarter UNIT SALES          69,000          104,000          54,000     227,000 add desired ending inventory 40%          41,600            21,600          13,600        13,600 Total Needs       110,600          125,600          67,600     240,600 Less beginning Inventory          27,600            41,600          21,600        27,600 Required Purchases          83,000            84,000          46,000     213,000 Cost of Purchase @ 4 per unit       332,000          336,000       184,000     852,000