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—$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)	21,600	June (budget)	51,600
February (actual)	27,600	July (budget)	31,600
March (actual)	41,600	August (budget)	29,600
April (budget)	66,600	September (budget)	26,600
May (budget)	101,600

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 $4.80 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	$	280,000
Rent	$	26,000
Salaries	$	122,000
Utilities	$	11,000
Insurance	$	3,800
Depreciation	$	22,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $20,000 in new equipment during May and $48,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,000 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	$	82,000
Accounts receivable ($38,640 February sales; $465,920 March sales)		504,560
Inventory		127,872
Prepaid insurance		25,000
Property and equipment (net)		1,030,000
Total assets	$	1,769,432
Liabilities and Stockholders’ Equity
Accounts payable	$	108,000
Dividends payable		21,000
Common stock		960,000
Retained earnings		680,432
Total liabilities and stockholders’ equity	$	1,769,432

The company maintains a minimum cash balance of $58,000. 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 $58,000 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 $58,000.

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

Sales Budget
	April	May	June	Total
EstimatedSales During the Month (in units) (A)	66600	101600	51600	219800
Selling price per unit (B)	14	14	14
Estimated Sales (A*B)	932400	1422400	722400	3077200
Calculation of expected cash collection
	April	May	June	Total
Estimated Sale ($) (A)	932400	1422400	722400	3077200
Cash Collectiion
20% in the month of sale (A*20%)	186480	284480	144480	615440
70% in the next month of sale	407680	652680	995680	2056040
10% in the second month of sale	38640	58240	93240	190120
	632800	995400	1233400	2861600
Merchandise Purchase Budget (In units)
	April	May	June	Total
Sales During the Month ($) (A)	66600	101600	51600	219800
Add: Closing Stock (40% of next month sale)	40640	20640	12640	73920
Less: Opening Stock	26640	40640	20640	87920
Required Purchase (in units)	80600	81600	43600	205800
Merchandise Purchase Budget (In dollar)
	April	May	June	Total
Required Purchase (in units) (A)	80600	81600	43600	205800
Purchase cost per unit (B)	4.8	4.8	4.8
Required Purchase (in dollars ) (A*B)	386880	391680	209280	987840
Cash disbursements for purchase budget	April	May	June	Total
Required Purchase ($) (A)	386880	391680	209280	987840
Cash disbursements
50% in the month of purchase (A*50%)	193440	195840	104640	493920
50% in the next month of purchase (A*50%)	137280	193440	195840	526560
Cash disbursements	330720	389280	300480	1020480
Notes
Cash receipts from previous quarter sales
	Total sales	Received in April	Received in May
Sales ($)
February	386400	38640
March	582400	407680	58240
Cash disbursement of previous month
	march
Sales requirement	41600
Add: Closing Stock (40% of next month sale)	26640
Less: Opening Stock	11040
Required in units (A)	57200
Purchase cost per unit (B)	4.8
Required Purchase (in dollars ) (A*B)	274560
50% to be paid in April	137280