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	June (budget)	53,200
February (actual)	29,200	July (budget)	33,200
March (actual)	43,200	August (budget)	31,200
April (budget)	68,200	September (budget)	28,200
May (budget)	103,200

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:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	360,000
Rent	$	34,000
Salaries	$	138,000
Utilities	$	15,000
Insurance	$	4,600
Depreciation	$	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:

Assets
Cash	$	90,000
Accounts receivable ($58,400 February sales; $691,200 March sales)		749,600
Inventory		152,768
Prepaid insurance		29,000
Property and equipment (net)		1,110,000
Total assets	$	2,131,368
Liabilities and Stockholders’ Equity
Accounts payable	$	116,000
Dividends payable		27,000
Common stock		1,120,000
Retained earnings		868,368
Total liabilities and stockholders’ equity	$	2,131,368

The company maintains a minimum cash balance of $66,000. 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 $66,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

2a. 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 $66,000.

2b. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

2c. A budgeted balance sheet as of June 30.

Answer 1

a) Sales Budget
	April	May	June	Quarter
Budgeted Unit Sales	68,200.	103,200.	53,200.	224,600.
Selling Price per unit	20	20	20	20
Total Sales	$1,364,000.00	$2,064,000.00	$1,064,000.00	$4,492,000.00
b)
1b. A schedule of expected cash collections from sales, by month and in total
	April	May	June	,Quarter
February sales = 29200 x $20x 10%	$     58,400.00			$     58,400.00
March sales = 43,200 x $20 x 70%; 43200 x $20 x 10%	$   604,800.00	$     86,400.00		$   691,200.00
April sales 68200 x 20 x 20%; 70% ;10%	$   272,800.00	$   954,800.00	$   136,400.00	$1,364,000.00
May sales 103,200 x 20 x 20%;70% ;		$   412,800.00	$1,444,800.00	$1,857,600.00
June sales 53,200 x $20 x 10%			$   106,400.00	$   106,400.00
Total Cash Sales	$   936,000.00	$1,454,000.00	$1,687,600.00	$4,077,600.00
1c. A merchandise purchases budget in units and in dollars. Show the budget by month and in toal
	April	May	June	Quarter
Budgeted unit sales	68,200.	103,200.	53,200.	224,600.
Add: Desired Ending Inventory 40% x (may , june, july sales units respectively)	41,280.	21,280.	13,280.	13,280.
Total needs	109,480.	124,480.	66,480.	300,440.
Less: Beginning Inventory	27,280.	41,280.	21,280.	27,280.
Required purchases	82,200.	83,200.	45,200.	210,600.
Unit Cost	5.6	5.6	5.6	5.6
Required $ purchases	$   460,320.00	$   465,920.00	$   253,120.00	$1,179,360.00
1d. A schedule of expected cash dibursements for merchandise purchases, by month in total
	April	May	June	Quarter
Accts. payable	$   116,000.00			$   116,000.00
April purchases	$   230,160.00	$   230,160.00		$   460,320.00
May purchases		$   232,960.00	$   232,960.00	$   465,920.00
June purchases			$   126,560.00	$   126,560.00
Total cash payments	$   346,160.00	$   230,160.00	$   232,960.00	$1,168,800.00
Earrings Unlimited
Cash Budget
For the Three Months Ending June 30
	April	May	June	Quarter
Cash balance	$     90,000.00	$     68,400.00	$   552,740.00	$     90,000.00
Add collections from customers	$   936,000.00	$1,454,000.00	$1,687,600.00	$4,077,600.00
Total cash available	$1,026,000.00	$1,522,400.00	$2,240,340.00	2,070,000
Less disbursements:
Merchandise purchases	$   346,160.00	$   340,500.00	$   340,500.00	$1,027,160.00
Advertising	$   360,000.00	$   360,000.00	$   360,000.00	$1,080,000.00
Rent	$     34,000.00	$     34,000.00	$     34,000.00	$   102,000.00
Salaries	$   138,000.00	$   138,000.00	$   138,000.00	$   414,000.00
Commissions (4% of sales)	$     37,440.00	$     58,160.00	$     67,504.00	$   163,104.00
Utilities	$     15,000.00	$     15,000.00	$     15,000.00	$     45,000.00
Equipment purchases	$                  -	$     24,000.00	$     56,000.00	$     80,000.00
Dividends paid	$     27,000.00	$                  -	$                  -	$     27,000.00
Total disbursements	$   957,600.00	$   969,660.00	$1,011,004.00	$2,938,264.00
Excess (deficiency) of receipts over disbursements	$     68,400.00	$   552,740.00	$1,229,336.00	$1,850,476.00
Financing:
Borrowings	$                  -	$                  -	$                  -	$                  -
Repayments	$                  -	$                  -	$                  -	$                  -
Interest	$                  -	$                  -	$                  -	$                  -
Total financing	$                  -		$                  -	$                  -
Cash balance, ending	$     68,400.00	$   552,740.00	$1,229,336.00	$1,229,336.00
EARRINGS UNLIMITED
Budgeted Income Statement
For the Three Months Ended June 30
Sales revenue (Part 1 a.)		$4,492,000.00
Less variable expenses:
Cost of goods sold @ $5.6 per unit	$1,257,760.00
Commissions @ 4% of sales	$   179,680.00	$1,437,440.00
Contribution margin		$3,054,560.00
Less fixed expenses:
Advertising	$1,080,000.00
Rent	$   102,000.00
Salaries	$   414,000.00
Utilities	$     45,000.00
Insurance	$     13,800.00
Depreciation	$     90,000.00	$1,744,800.00
Net operating income		$1,309,760.00
Interest		$                  -
Net income		$1,309,760.00
EARRINGS UNLIMITED
Budgeted Balance Sheet
30-Jun
Assets
Cash	$1,229,336.00
Accounts receivable (see below)	1057600
Inventory (13,280 units @ $5.6 per unit)	74368
Prepaid insurance  (29000 - 13800)	$     15,200.00
Property and equipment, net	$1,100,000.00
Total assets	$3,476,504.00
Liabilities and Stockholders’ Equity
Accounts payable, purchases (50% × $253120)	$   126,560.00
Dividends payable	$     27,000.00
Capital stock	$1,120,000.00
Retained earnings (see below)	$2,202,944.00
Total liabilities and stockholders’ equity	$3,476,504.00
Accounts receivable at June 30:
10% × May sales of $2064000	206400
80% × June sales of $1064000	851200
Total	1057600
Retained earnings at June 30:
Balance, March 31	868368
Add net income (part 3)	$1,309,760.00
Total	$2,178,128.00
Less dividends declared	-27000
Balance, June 30	$2,151,128.00