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 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—$11 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)	20,200	June (budget)	50,200
February (actual)	26,200	July (budget)	30,200
March (actual)	40,200	August (budget)	28,200
April (budget)	65,200	September (budget)	25,200
May (budget)	100,200

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 $4.1 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	$	210,000
Rent	$	19,000
Salaries	$	108,000
Utilities	$	7,500
Insurance	$	3,100
Depreciation	$	15,000

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

The company plans to purchase $16,500 in new equipment during May and $41,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,750 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	$	75,000
Accounts receivable ($28,820 February sales;    $353,760 March sales)		382,580
Inventory		106,928
Prepaid insurance		21,500
Property and equipment (net)		960,000
Total assets	$	1,546,008
Liabilities and Stockholders’ Equity
Accounts payable	$	101,000
Dividends payable		15,750
Common stock		820,000
Retained earnings		609,258
Total liabilities and stockholders’ equity	$	1,546,008

The company maintains a minimum cash balance of $51,000. 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 $51,000 in cash.

b.	A schedule of expected cash collections from sales, by month and in total.

               

	Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February sales $0 March sales 0 April sales 0 May sales 0 June sales 0 Total cash collections $0 $0 $0 $0
		c.	A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round "Unit cost" answers to 2 decimal places.)

               

	Earrings Unlimited Merchandise Purchases Budget April May June Quater Budgeted unit sales 0 Total needs 0 0 0 0 Required purchases 0 0 0 0 Unit cost Required dollar purchases $0 $0 $0 $0
		d.	A schedule of expected cash disbursements for merchandise purchases, by month and in total.

               

Answer 1

b)
Earrings Unlimited
Schedule of Expected Cash Collections
	April (a)	May (b)	June (c )	Quarter (a+b+c)
Cash collections from:
February sales (26,200*$11*10/100)	$28,820			$28,820
March sales (40,200*$11*70/100); (40,200*$11*10/100)	$308,540	$44,220		$352,760
April sales (65,200*$11*20/100); (65,200*$11*70/100); (65,200*$11*10/100)	$143,440	$502,040	$71,720	$717,200
May sales (100,200*$11*20/100); (100,200*$11*70/100)		$220,440	$771,540	$991,980
June sales (50,200*$11*20/100)			$110,440	$110,440
Total Cash Collections	$480,800	$766,700	$953,700	$2,201,200
c)
Earrings Unlimited
Merchandise Purchases Budget
	April (a)	May (b)	June (c )	Quarter (a+b+c)
Budgeted unit sales	65,200	100,200	50,200	215,600
Add: Desired ending inventory (100,200*40/100); (50,200*40/100); (30,200*40/100)	40,080	20,080	12,080	72,240
Total Needs	105,280	120,280	62,280	287,840
Less: Beginning inventory (last month's ending inventory will be the beginning inventory in current month) (65,200*40/100)	26,080	40,080	20,080	86,240
Units required to purchase (a)	79,200	80,200	42,200	201,600
Unit cost (b)	$4.10	$4.10	$4.10	$4.10
Required dollar purchases (a*b)	$324,720	$328,820	$173,020	$826,560
d)
Earrings Unlimited
Schedule of Expected Cash Disbursements for Merchandise Purchases
	April (a)	May (b)	June (c )	Quarter (a+b+c)
Cash disbursements for merchandise purchase:
March Purchases (40,200 + 40%*65,200 - 40%*40,200 = 50,200 * $4.10 * 1/2)	$102,910			$102,910
April Purchases ($324,720*1/2); ($324,720*1/2)	$162,360	$162,360		$324,720
May Purchases ($328,820*1/2); ($328,820*1/2)		$164,410	$164,410	$328,820
June Purchases ($173,020*1/2)			$86,510	$86,510
Total Cash Disbursements for Merchandise Purchases	$265,270	$326,770	$250,920	$842,960