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—$14 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) 20,900   June (budget) 50,900
  February (actual) 26,900   July (budget) 30,900
  March (actual) 40,900   August (budget) 28,900
  April (budget) 65,900   September (budget) 25,900
  May (budget) 100,900

   

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 30% of the earrings sold in the following month.

   

Suppliers are paid $8 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 60% is collected in the following month, and the remaining 20% 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 $ 199,100    
     Rent $ 17,100    
     Salaries $ 105,100    
     Utilities $ 6,100    
     Insurance $ 2,100    
     Depreciation $ 13,100    

    

Insurance is paid on an annual basis, in November of each year.
    
The company plans to purchase $15,300 in new equipment during May and $39,100 in new equipment during June; both purchases will be for cash. The company declares dividends of $10,500 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   Liabilities and Stockholders' Equity
  Cash $ 150,000   Accounts payable $ 193,600
  Accounts receivable ($75,320 February
     sales; $458,080 March sales)
533,400   Dividends payable 10,500
  Inventory 158,160   Capital stock 890,000
  Prepaid insurance 21,900   Retained earnings 589,000
  Property and equipment (net) 819,640
  Total assets $ 1,683,100   Total liabilities and stockholders' equity $ 1,683,100

   

The company maintains a minimum cash balance of $30,000. 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 $30,000 in cash.

    
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

    

Requirement 1:
(a) A sales budget, by month and in total. (Omit the "$" sign in your response.)

    

April May June Quarter
  Budgeted sales in units            
  Selling price per unit $    $    $    $   
  Total sales $    $    $    $   

    

(b)

A schedule of expected cash collections from sales, by month and in total. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

    

April May June Quarter
  February sales $    $    $    $   
  March sales            
  April sales            
  May sales            
  June sales            
  Total cash collections $    $    $    $   

    

(c) A merchandise purchases budget in units and in dollars, by month and in total. (Omit the "$" sign in your response.)

    

April May June Quarter
  Required unit purchases            
  Required dollar purchases $    $    $    $   

     

(d)

A schedule of expected cash disbursements for merchandise purchases, by month and in total. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

     

April May June Quarter
  Accounts payable $    $    $    $   
  April purchases            
  May purchases            
  June purchases            
  Total cash payments $    $    $    $   

Solutions

Expert Solution

Solution 1a:

Sales Budget - Earrings Unlimited
Particulars April May June Total
Budgeted Sales units 65900 100900 50900 217700
Selling price per unit $14.00 $14.00 $14.00 $14.00
Total Sales $922,600.00 $1,412,600.00 $712,600.00 $3,047,800.00

Solution 1b:

Schedule of expected cash collection - Earrings Unlimited
Particulars April May June Total
Cash received for Feburary Sale $75,320.00 $75,320.00
Cash received for March Sale $343,560.00 $114,520.00 $458,080.00
Cash received for April Sale $184,520.00 $553,560.00 $184,520.00 $922,600.00
Cash received for May Sale $282,520.00 $847,560.00 $1,130,080.00
Cash received for June Sale $142,520.00 $142,520.00
Budgeted Cash Collection $603,400.00 $950,600.00 $1,174,600.00 $2,728,600.00

Solution 1c:

Merchandise Purchase Budget - Earrings Unlimited
Particulars April May June Total
Sales units 65900 100900 50900 217700
Add: Desired ending inventory (30% of next month sales) 30270 15270 9270 9270
Total needs 96170 116170 60170 226970
Less: Opening Inventory 19770 30270 15270 19770
Estimated purchase for earrings (In pairs) 76400 85900 44900 207200
Cost per pair $8.00 $8.00 $8.00 $8.00
Budgeted purchases (in dollars) $611,200.00 $687,200.00 $359,200.00 $1,657,600.00

Solution 1d:

Budgeted Cash disbursement for merchandise purchases - Earrings Unlimited
Particulars April May June Total
Accounts Payable $193,600.00 $193,600.00
April Purchases $305,600.00 $305,600.00 $611,200.00
May Purchases $343,600.00 $343,600.00 $687,200.00
June Purchases $179,600.00 $179,600.00
Total cash payments $499,200.00 $649,200.00 $523,200.00 $1,671,600.00

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