Question

In: Accounting

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...

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 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—$15 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) 22,200   June (budget) 52,200
  February (actual) 28,200   July (budget) 32,200
  March (actual) 42,200   August (budget) 30,200
  April (budget) 67,200   September (budget) 27,200
  May (budget) 102,200

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 $5.1 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, with no discount, and payable within 15 days. The company has found, however, that 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 $ 310,000
     Rent $ 29,000
     Salaries $ 128,000
     Utilities $ 12,500
     Insurance $ 4,100
     Depreciation $ 25,000  
Insurance is paid on an annual basis, in November of each year.

     The company plans to purchase $21,500 in new equipment during May and $51,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $23,250 each quarter, payable in the first month of the following quarter.

     A listing of the company’s ledger accounts as of March 31 is given below:
Assets
  Cash $ 85,000
  Accounts receivable ($42,300 February sales;    $506,400 March sales) 548,700
  Inventory 137,088
  Prepaid insurance 26,500
  Property and equipment (net) 1,060,000
  Total assets $ 1,857,288
Liabilities and Stockholders’ Equity
  Accounts payable $ 111,000
  Dividends payable 23,250
  Common stock 1,020,000
  Retained earnings 703,038
  Total liabilities and stockholders’ equity $ 1,857,288

     The company maintains a minimum cash balance of $61,000. 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 $61,000 in cash.

Question:

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

Solutions

Expert Solution

Budgeted income statement for the three-month period ending June 30 is as prepared below:

Earings Unlimited
Budgeted Income Statement
For the three month ended June 30
Particulars Amount ($) Amount ($)
Sales 3,324,000
Less: Cost of goods sold (221,600*5.1) 1,130,160
Variable expenses:
Commissions 132,960
Interest expense (151,000*2%) 3,020
Insurance (4,100*3) 12,300
148,280
Contribution Margin 2,045,560
Fixed Expenses:
Advertising 930,000
Rent 87,000
Salaries 384,000
Depreciation (25,000*3) 75,000
Utilities 37,500 1,513,500
Net operating Income 532,060
Dividend Paid 23,250
Net Income 508,810

Working:

1a
Earings unlimited
Sales Budget
For the quarter ended June 30
Month
Particulars April May June Total
Budgeted Unit sales 67,200 102,200 52,200 221,600
Sale Price 15 15 15 15
Budgeted sales 1,008,000 1,533,000 783,000 3,324,000
1b.
Earings unlimited
Schedule of expected Cash collections
For the quarter ended June 30
Month
Particulars April May June Total
Beginning Accounts Receivable
February sales (28,200*15*10%) 42,300 42,300
March sales (42,200*15*70%) 443,100 443,100
March sales (42,200*15*10%) 63,300 63,300
April Credit Sales 201,600 705,600 100,800 1,008,000
May Credit Sales 306,600 1,073,100 1,379,700
June Credit sales 156,600 156,600
Total collections 687,000 1,075,500 1,330,500 3,093,000
Account receivable for June Sale 626,400
Account receivable for May Sale 153,300
1c.
Earings unlimited
Merchandise Purchase Budget
For the quarter ended June 30
Month
Particulars April May June Total july
Budgeted Unit Sales 67,200 102,200 52,200 221,600 32,200
Add: Desired Ending merchandise inventory (40% of next month sales) 40,880 20,880 12,880 12,880
Total needs 108,080 123,080 65,080 234,480
Less: beginning merchandise inventory 26,880 40,880 20,880 26,880
Required purchase 81,200 82,200 44,200 207,600
Unit Cost 5.1 5.1 5.1 5.1
Required dollar purchases $414,120 $419,220 $225,420 $1,058,760
1d.
Earings unlimited
Schedule of expected Cash payments
For the quarter ended June 30
Month
Particulars April May June Total
Beginning Accounts Payable (a) $111,000 $111,000
April Purchases (b) $207,060 $207,060 $414,120
May Purchases (c ) $209,610 $209,610 $419,220
June Purchases (d) $112,710 $112,710 $112,710
Total payments (a+b+c+d) $318,060 $416,670 $322,320 $1,057,050
Earings unlimited
Commission
For the quarter ended June 30
Month
Particulars April May June Total
Budgeted Unit sales 67,200 102,200 52,200 221,600
Sale Price 15 15 15 15
Budgeted sales 1,008,000 1,533,000 783,000 3,324,000
Sales commisssions (4% of sales) 40,320 61,320 31,320 132,960
2
Earings unlimited
Cash Budget
For the quarter ended June 30
Month
Particulars April May June Total
Beginning Cash balance 85,000 61,870 158,380 85,000
Add: Collection from customers $687,000 $1,075,500 $1,330,500 $3,093,000
cash available for use $772,000 $1,137,370 $1,488,880 $3,178,000
Less: cash Disbursements
Merchandise purchase $318,060 $416,670 $322,320 1,057,050
Advertising 310,000 310,000 310,000 930,000
Rent 29,000 29,000 29,000 87,000
Salaries 128,000 128,000 128,000 384,000
Commissions 40,320 61,320 31,320 132,960
Utilities 12,500 12,500 12,500 37,500
Equipment purchase 21,500 51,000 72,500
Dividend paid 23,250 23250
Total disbusrement 861,130 978,990 884,140 2,724,260
Cash surplus/Deficit -89,130 158,380 604,740 453,740
Financing
   Borrowing 151,000 151,000
   Repayment -151,000 -151,000
   Interest -3,020 -3,020
Net cash from Financing 151,000 0 -154,020 -3,020
Budgeted ending cash balance 61,870 158,380 450,720 450,720
Earings Unlimited
Budgeted Income Statement
For the three month ended June 30
Particulars Amount ($) Amount ($)
Sales 3,324,000
Less: Cost of goods sold (221,600*5.1) 1,130,160
Variable expenses:
Commissions 132,960
Interest expense (151,000*2%) 3,020
Insurance (4,100*3) 12,300
148,280
Contribution Margin 2,045,560
Fixed Expenses:
Advertising 930,000
Rent 87,000
Salaries 384,000
Depreciation (25,000*3) 75,000
Utilities 37,500 1,513,500
Net operating Income 532,060
Dividend Paid 23,250
Net Income 508,810

Related Solutions

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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 comprehensive budgets for the upcoming second quarter in order to show management the...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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...
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT