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—$15 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)	21,000	June (budget)	51,000
February (actual)	27,000	July (budget)	31,000
March (actual)	41,000	August (budget)	29,000
April (budget)	66,000	September (budget)	26,000
May (budget)	101,000

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 $4.5 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	$	250,000
Rent	$	23,000
Salaries	$	116,000
Utilities	$	9,500
Insurance	$	3,500
Depreciation	$	19,000

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

The company plans to purchase $18,500 in new equipment during May and $45,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $18,750 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	$	79,000
Accounts receivable ($40,500 February sales;    $492,000 March sales)		532,500
Inventory		118,800
Prepaid insurance		23,500
Property and equipment (net)		1,000,000
Total assets	$	1,753,800
Liabilities and Stockholders’ Equity
Accounts payable	$	105,000
Dividends payable		18,750
Common stock		900,000
Retained earnings		730,050
Total liabilities and stockholders’ equity	$	1,753,800

The company maintains a minimum cash balance of $55,000. 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 $55,000 in cash. Required 1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: a. A sales budget, by month and in total. Earrings Unlimited Sales Budget April May June Quarter Budgeted unit sales Selling price per unit Total sales 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 March sales April sales May sales June sales Total cash collections

Answer 1

1
(a)			Sales budget
				April	May	June	Quarter
	Budgeted unit sales			66000	101000	51000
	Selling price per unit			15	15	15
	Total sales			990000	1515000	765000	3270000
(b)			Schedule of expectd cash collectons
				April	May	June	Quarter
	February sales			2700			2700
				(27000*10%)
	March sales			28700	4100		32800
				(41000*70%)	(41000*10%)
	April sales			13200	46200	6600	66000
				(66000*20%)	(66000*70%)	(66000*10%)
	May sales				20200	70700	90900
					(101000*20%)	(101000*70%)
	June sales					10200	10200
						(51000*20%)
	Total cash collections			44600	70500	87500	202600
©
			Merchandise purchase budget
				April	May	June	Quarter
	Budgetd unit sales			66000	101000	51000	218000
	Add: Ending inventory			40400	20400	12400	73200
				(101000*40%)	(51000*40%)	(31000*40%)
	Total needs			106400	121400	63400	291200
	Less: Beginning inventory			26400	40400	20400	87200
				(66000*40%)	(101000*40%)	(51000*40%)
	Required purchases			80000	81000	43000	204000
	Unit cost			4.5	4.5	4.5
	Required $ purchase			360000	364500	193500	918000
	Ending inventory=40% of following moth sales
(d)			Budgetd cash disbursements for merchandise purchases
				April	May	June	Quarter
	Accounts payable			105000			105000
	April Purchases			180000	180000		360000
				(360000*1/2)	(360000*1/2)
	May Purchases				182250	182250	364500
					(364500*1/2)	(364500*1/2)
	June Purchases					96750	96750
						(193500*1/2)
	Total cash payments			285000	362250	279000	926250