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—$13 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) February (actual) March (actual) April (budget) May (budget) 21,400 27,400 41,400 66,400 101,400 June (budget) July (budget) August (budget) September (budget) 51,400 31,400 29,400 26,400 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 $4.70 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 $ 270,000 $ 25,000 $ 120,000 $ 10,500 $ 3,700 $ 21,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $19,500 in new equipment during May and $47,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $20,250 each quarter, payable in the first month of the following quarter. The company's balance sheet as of March 31 is given below:

Answer 1

1.A Sales Budget

Particulars	April	May	June	Quarter
Budgeted Units	66400	101400	51400	219200
Selling Price p.u.$	13	13	13	13
Budgeted Sales $	863200	1318200	668200	2849600

b. Expected Cash Collections

Particulars	April	May	June	Quarter
Feb Sales 10% in april	35620	0	0	35620
March70 % in april, 10% in may	376740	53820	0	430560
April 20% of own, 70 in May & 10in June	172640	604240	86320	863200
May 20% of own,70 in June	0	263640	922740	1186380
June 20% of own	0	0	133640	133640
Total	585000	921700	1142700	2649400

c. Merchandise Purchase Budget

Particulars	April	May	June	Quarter
Budgeted Units Sales	66400	101400	51400	219200
Required Purchases in units 60% of own & 40% of next	80400	81400	43400	205200
Unit Cost $	4.7	4.7	4.7	4.7
Required Purchases in $	377880	382580	203980	964440

d. Cash Disbursements for Merchandise Purchases

Particulars	April	May	June	Quarter
Accounts Payable50% of Previous	107000 given	188940	191290	487230
April Purchases50%	188940	0	0	188940
May	0	191290	0	191290
June	0	0	101990	101990
Total Cash Disbursements	295940	380230	293280	969450

2. Cash Budget

Particulars	April	May	June	Quarter
Op. Balance	81000	57782	57000	195782
Add: Collections from Customer	585000	921700	1142700	2649400
Total Cash Available	666000	979482	1199700	2845182
Less: Cash Disbursements
merchandise Purchases	295940	380230	293280	969450
Advertising	270000	270000	270000	810000
Rent	25000	25000	25000	75000
Salaries	120000	120000	120000	360000
Commissions 4% of Sales	34528	52728	26728	113984
Utilities	10500	10500	10500	31500
Equipment Purchases	0	19500	47000	66500
Dividends Paid	20250	0	0	20250
Total Cash Disbursements	776218	877958	792508	2446684
Excess/ ( Deficiency)	(110218)	101524	407192	398498
Financing:
borrowings in '000 with 57000 min. cash	168000	0	0	168000
Repayments in '000 with 57000 min. cash	0	(44000)	(124000)	(168000)
Interest at 1% Simple Interest	0	0	(5040)	(5040)
Total Financing	168000	(44000)	(129040)	(5040)
Ending Cash Balance	57782	57000	278152	392934

3. Budgeted Income Statement

Particulars	Amount
Sales	2849600
Less: Variable Expenses
Merchandise Purchases	969450
Sales Commissions 4%	113984
Less: Fixed Expenses
Advertising	810000
Rent	75000
Salaries	360000
Utilities	31500
Interest	5040
Depreciation	63000
Dividends	20250
Profit	401376