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-$20 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) 23,200 February (actual) 29,200 March (actual) 43,200 April (budget) 68,200 May (budget) 103,200 June (budget) 53,200 July (budget) 33,200 August (budget) 31,200 September (budget) 28,200 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 $5.60 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: 4% of sales Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation $360,000 $ 34,000 $138,000 $ 15,000 $ 4,600 $ 30,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $24.000 in new equipment during May and $56,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,000 each quarter, payable in the first month of the following quarter. The company's balance sheet as of March 31 is given below: $ 90,000 Assets Cash Accounts receivable ($58,400 February sales; $691,200 March sales) Inventory Prepaid insurance Property and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts pavable 749,600 152,768 29,000 1,110,000 $2,131,368 $ 116.000

Answer 1

Calculation April May June Earrings Unlimited Sales Budget Req la Sales in Units Sales price per unit Total Sales April May 68,200 103,200 20 20 1,364,000 2,064,000 June 53,200 20 1,064,000 Quarter 224,600 20 4,492,000 -68,200*20 =103,200*20 =53,200*20 May June May June Schedule of expected cash collections Req 1b April Feb sales 58,400 Mar sales 604,800 April sales 272,800 May sales June sales Total collections 936,000 Calculation April '=29,200*20*10% -43,200*20*70% =1,364,000*20% 86,400 954,800 412,800 Quarter 58,400 691,200 1,364,000 1,857,600 212,800 4,184,000 -43,200*20*10% =1,364,000*70% =2,064,000*20% 136,400 1,444,800 212,800 1,794,000 =1,364,000*10% =2,064,000*70% =1,064,000*20% 1,454,000 April May June =103,200*40% =53,200*40% =33,200*40% Merchandise Purchases Budget Req 1c Budgeted sales Add Desired Ending Inventory Total Needs Less Beginning Inventory Required Purchases in Units Purchase price per unit Required Purchases in Dollars April 68,200 41,280 109,480 27,280 82,200 5.60 460,320 May 103,200 21,280 124,480 41,280 83,200 5.60 465,920 June 53,200 13,280 66,480 21,280 45,200 5.60 253,120 Quarter 224,600 13,280 237,880 27,280 210,600 =68,200*40% End Inv of April End Inv of May 5.60 1,179,360 82,200*5.60 83,200*5.60 45,200*5.60 April June April May June Schedule of expected cash disbursements-Purchases Req 1d May Accounts Payable 116,000 April Purchases 230,160 230,160 May Purchases 232,960 June Purchases Total disbursements for purchases 346,160 463,120 =460,320/2 Quarter 116,000 460,320 465,920 126,560 1,168,800 '-460,320/2 -465,920/2 232,960 126,560 359,520 =465,920/2 =253,120/2 April April May June 90,000 936,000 1,026,000 May 66,280 1,454,000 1,520,280 June 403,600 1,794,000 2,197,600 Quarter 90,000 4,184,000 4,274,000 1,364,000*4% 2,064,000*4% 1,064,000*4% Cash budget Req2 Cash balance, beginning Add Cash collections Total cash available Less cash disbursements Inventory Purchases Sales commissions Advertising Rent Salaries Utilites Equipment Dividends Total Cash disbursements Excess (deficiency) of cash Financing Borrowings at beginning Repayments at end Interest at 1% per month Total financing Cash balance, ending 346,160 54,560 360,000 34,000 138,000 15,000 463,120 82,560 360,000 34,000 138,000 15,000 24,000 359,520 42,560 360,000 34,000 138,000 15,000 56,000 1,168,800 179,680 1,080,000 102,000 414,000 45,000 80,000 27,000 3,096,480 1,177,520 27,000 974,720 51,280 1,116,680 403,600 1,005,080 1,192,520 15,000 15,000 =66,000-51,000 (15,000) Round off cash of $51,280 to $51,000 for borrowings calculation (450) =15,000*1%*3 (450) 1,177,070 (450) (15,450) 1,177,070 15,000 66,280 403,600

April 1,364,000 May 2,064,000 June May June 1,064,000 April Quarter 4,492,000 =68,200*5.60 1,364,000*4% =103,200*5.60 2,064,000*4% =53,200*5.60 1,064,000*4% 381,920 54,560 436,480 927,520 577,920 82,560 660,480 1,403,520 297,920 42,560 340,480 723,520 1,257,760 179,680 1,437,440 3,054,560 Income Statement Reg 3 Sales Variable Costs Cost of goods sold Sales commissions Total Variable Costs Contribution Margin Fixed Costs Advertising Rent Salaries Utilites Insurance Depreciation Interest expense Total Fixed Costs Net Income 360,000 34,000 138,000 15,000 4,600 30,000 150 581,750 345,770 360,000 34,000 138,000 15,000 4,600 30,000 150 581,750 581,750 821,770 360,000 34,000 138,000 15,000 4,600 30,000 150 581,750 141,770 1,080,000 102,000 414,000 45,000 13,800 90,000 450 1,745,250 1,309,310 =15,000*1% =15,000*1% =15,000*1% Balance Sheet Req4 Assets Cash Accounts Receivable Inventory Prepaid Insurance Property & Equipment, net Total Assets 1,177,070 1,057,600 74,368 15,200 1,100,000 3,424,238 =(2,064,000*10%)+(1,064,000*80%) 13,280*5.60 =29,000-13,800 =1,110,000+80,000-90,000 =253,120/2 Liabilities & Equity Accounts Payable Dividends Payable Common Stock Retained Earnings Liabilities & Equity 126,560 27,000 1,120,000 2,150,678 3,424,238 =868,368+1,309,310-27,000