Question

Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]

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—$16 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)	22,400	June (budget)	52,400
February (actual)	28,400	July (budget)	32,400
March (actual)	42,400	August (budget)	30,400
April (budget)	67,400	September (budget)	27,400
May (budget)	102,400

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 $5.20 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	$	320,000
Rent	$	30,000
Salaries	$	130,000
Utilities	$	13,000
Insurance	$	4,200
Depreciation	$	26,000

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

The company plans to purchase $22,000 in new equipment during May and $52,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $24,000 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	$	86,000
Accounts receivable ($45,440 February sales; $542,720 March sales)		588,160
Inventory		140,192
Prepaid insurance		27,000
Property and equipment (net)		1,070,000
Total assets	$	1,911,352
Liabilities and Stockholders’ Equity
Accounts payable	$	112,000
Dividends payable		24,000
Common stock		1,040,000
Retained earnings		735,352
Total liabilities and stockholders’ equity	$	1,911,352

The company maintains a minimum cash balance of $62,000. 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 $62,000 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 $62,000.

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

Solution:

Part 1(a) - A sales budget, by month and in total.

Sales Budget
	April	May	June	Total for Quarter 2
Expected Unit Sales	67,400	102,400	52,400	222,200
Unit Selling Price	$16	$16	$16	$16
Budgeted Sales in dollars	$1,078,400	$1,638,400	$838,400	$3,555,200

Part 1(b) - A schedule of expected cash collections, by month and in total

Schedule of Expected Cash Collections
	April	May	June	Quarter
Sales on Account:
February Sales (28,400*$16*10%) - Collected in April	$45,440
March Sales (42,400*$16*70%) - Collected in April	$474,880
March Sales (42,400*$16*10%) - Collected in May		$67,840
April Sales ($1,078,400*20%) - Collected in April	$215,680
April Sales ($1,078,400*70%) - Collected in May		$754,880
April Sales ($1,078,400*10%) - Collected in June			$107,840
May Sales ($1,638,400*20%) - Collected in May		$327,680
May Sales ($1,638,400*70%) - Collected in June			$1,146,880
June Sales ($838,400*20%)- Collected in June			$167,680
Total Expected Cash Collections	$736,000	$1,150,400	$1,422,400	$3,308,800

Part 1(c ) - A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

Merchandise Purchases Budget					For Working
	April	May	June	Quarter	July	August
Expected Sales Unit	67400	102400	52400		32400	30400
Plus: Desired Ending Inventory (40% of following months sales units)	40960	20960	12960		12160
Total Needs	108360	123360	65360		44560
Less: Estimated Beginning Inventory (Ending inventory of last month)	26960	40960	20960		12960
Required Merchandise Purchases in units	81400	82400	44400		31600
Purchased Price per pair	$5.20	$5.20	$5.20
Required Merchandise Purchases in dollars	$423,280	$428,480	$230,880	$1,082,640

Part 1(d) - A schedule of expected cash disbursements for merchandise purchases, by month and in total

Schedule of Expected Cash Disbursements
	April	May	June	Quarter
Beginning Accounts Payable	$112,000
April Purchases (50% paid in april and 50% in May)	$211,640	$211,640
May Purchases (50% paid in May and 50% in June)		$214,240	$214,240
June Purchases (50% paid in June)			$115,440
Total Cash disbursements	$323,640	$425,880	$329,680	$1,079,200

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for other parts