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.

Selected items from the company’s March 31 balance sheet are as follows:

Cash	$	94,000
Accounts receivable ($57,000 February sales; $668,800 March sales)		725,800
Inventory		165,600
Accounts payable		120,000
Dividends payable		30,000

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.

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.

Answer 1

Part 1(a) - Sales Budget

Particulars	April	May	June	Quarter
Sales in Units Budgeted (A)	69000	104000	54000	227000
Sales Price Per Unit (B)	$19	$19	$19	$19
Sales Budget (A*B)	$1311000	$1976000	$1026000	$4313000

Part 1(b) - Schedule of Expected Cash Collection

Particulars	April	May	June	Quarter
February sales(30000*$19)= $570000	$57000 ($570000*10%)			$57000
March sales (44000 * $69) = $836000	$585200 ($836000*70%)	$83600 ($836000*10%)		$668800
April Sales	$262200 ($1311000*20%)	$917700 ($1311000*70%)	$131100 ($1311000*10%)	$1311000
May Sales		$395200 ($1976000*20%)	$1383200 ($1976000*70%)	$1778400
June Sales			$205200 ($1026000*20%)	$205200
Total	$904400	$1396500	$1719500	$4020400

Part 1(c) - Purchase Budget

Particulars	April	May	June	Quarter
Budgeted sales in units	69000	104000	54000	227000
Add : Ending Inventory	41600 (104000*40%)	21600 (54000*40%)	13600 (34000*40%)	76800
Total Requirement	110600	125600	67600	303800
Less : Beginning Inventory	27600 (69000*40%)	41600	21600	90800
Purchase Budget	83000	84000	46000	213000
Purchase budget amount @ $6 per pair	$498000	$504000	$276000	$1278000

Part 1(d) - Cash Disbursement Budget

Particulars	April	May	June	Quarter
Accounts Payable Paid	$120000			$120000
April Purchases	$249000 ($498000*50%)	$249000 ($498000*50%)		$498000
May Purchases		$252000 ($504000*50%)	$252000 ($504000*50%)	$504000
June Purchases			$138000 ($276000*50%)	$138000
Total	$369000	$501000	$390000	$1260000

Part 2 - Cash Budget

Particulars	April	May	June	Quarter
Beginning Cash Balance	$94000	$70960	$286420	$451380
Cash Collection	$904400	$1396500	$1719500	$4020400
Total Available cash	$998400	$1467460	$2005920	$4471780
Less : Disbursements
Cash Paid to Suppliers	$369000	$501000	$390000	$1260000
Sales Commission 4%	$52440 ($1311000*4%)	$79040 ($1976000*4%)	$41040 ($1026000*4%)	$172520
Advertising expenses	$400000	$400000	$400000	$1200000
Rent expenses	$38000	$38000	$38000	$114000
Salary Expenses	$146000	$146000	$146000	$438000
Utilities Expenses	$17000	$17000	$17000	$51000
Dividend paid	$30000			$30000
Total Disbursements	$1052440	$1181040	$1032040	$3265520
Cash Balance	($54040)	$286420	$973880	$1206260
Add : Borrowing	$125000			$125000
Less : Repaymeny			($125000)	($125000)
Less : Interest			($3750) ($125000*1%*3)	($3750)
Ending Cash Balance	$70960	$286420	$845130	$1202510