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-$19 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) 24,000 30,000 44,000 69,000 104.000 June (budget) July (budget) August (budget) September (budget) 54,000 34,000 32,000 29,000 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 $6.00 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: 48 of sales Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation $ 400,000 $ 38,000 $ 146,000 $ 17,000 $ 5.000 $ 34,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $26,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $30,000 each quarter, payable in the first month of the following quarter. The company's balance sheet as of March 31 is given below: $ 94,000 Assets Cash Accounts receivable ($57,000 February sales; $668,800 March sales) Inventory Prepaid insurance Property and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable Common stock Retained earnings Total liabilities and stockholders' equity 725, 800 165,600 31,000 1,150,000 $ 2,166,400 $ 120,000 30,000 1,200,000 816,400 $ 2,166,400 The company maintains a minimum cash balance of $70,000. 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 $70,000 in cash.

Answer 1

Answer with full working is given below

Sales Budget April 69,000 Budgeted Unit sales Selling price per unit Total Sales May 104,000 $19 $1,976,000 $19 June Quarter 54,000 227,000 $19 $19 $1,026,000 $4,313,000 $1,311,000 b. Schedule of Cash collected from Customers April $1,311,000 May $1,976,000 June Quarter $1,026,000 $4,313,000 Sales Collection February sale March Sale - Total Sales $ 836,000 April Sales May Sales June Sales Total Cash Collections $57,000 $585,200 $262,200 $83,600 $917,700 $395,200 $57,000 $668,800 $131,100 $1,311,000 $1,383,200 $1,778,400 $205,200 $205,200 $1,719,500 $4,020,400 $904,400 $1,396,500 Purchase Budget - Units July 34,000 Budgeted Unit Sales Add: Closing stock ( 40% of sale of following month) Total Needs Less Opening Stock Required Purchase Unit Cost Purchase value budget April 69,000 41,600 110,600 27,600 83,000 $6.00 $498,000 May 104,000 21,600 125,600 41,600 84,000 $6.00 $504,000 June Quarter 54,000 227,000 13,600 13,600 67,600 240,600 21,600 27,600 46,000 213,000 $6.00 $6.00 $276,000 $1,278,000 d. Schedule of Cash payment for purchases April $498,000 May $504,000 June Quarter $276,000 $1,278,000 Purchases Payment Accounts Payable April Purchase May Purchase June Purchase Total Cash Payments $120,000 $249,000 $249,000 $252,000 $120,000 $498,000 $252,000 $504,000 $138,000 $138,000 $390,000 $1,260,000 $369,000 $501,000 Carcisa liite Earrings Unlimited Cash Budget For the Three months Ended June 30 April $94,000 May $70,960 June $260,420 Quarter $94,000 Opening Balance of Cash Receipt of Cash Collection from Customers Cash available for disbursement $904,400 $998,400 $1,396,500 $1,467,460 $1,719,500 $4,020,400 $1,979,920 $4,114,400 $369,000 $400,000 $38,000 $146,000 $52,440 $17,000 $501,000 $400,000 $38,000 $146,000 $79,040 $17,000 $26,000 Merchandise purchase Advertising Rent Salaries Sales Commission - 4% of Sales Utilities Equipment purchase Dividends paid Cash paid for disbursements Net Cash available Financing Borrowings (at the beginning of the month) Repayments at the end of quarter) Interest (at 1% per month) Total financing Closing cash balance $390,000 $1,260,000 $400,000 $1,200,000 $38,000 $114,000 $146,000 $438,000 $41,040 $172,520 $17,000 $51,000 $60,000 $86,000 $30,000 $1,092,040 $3,351,520 $887,880 $ 762,880 $30,000 $1,052,440 $54,040 $1,207,040 $260,420 $125,000 $125,000 $125,000 $3,750 $3,750 $759,130 -$125,000 $3,750 $128,750 $759,130 $125,000 $70,960 $0 $260,420 Interest on short term borrowing @1% Month Borrowing Interest April $125,000 $3,750 Interest for 3 month $3,750 3. $4,313,000 Earrings Unlimited Budgeted Income Statement For the Three Months Ending June 30 Sales Variable expense Cost of Goods sold - $6 per pair of earrings $1,362,000 Commission - 4% of Sales $172,520 Total variable expenses $1,534,520 $2,778,480 Contribution margin Less: Fixed Cost Salaries Utilities Insurance Advertising Rent Depreciation Total fixed expenses Net operating income Interest expense Interest on short term loan Net Income $438,000 $51,000 $15,000 $1,200,000 $114,000 $102,000 $1,920,000 $858,480 $3,750 $854,730

Earrings Unlimited Budgeted Balance Sheet As of June 30 Assets Current Assets Cash Accounts receivable Inventory Prepaid Insurance Fixed Assets Property and Equipment Add: Purchases $759,130 $1,018,400 $81,600 $16,000 $1,875,130 $1,150,000 $86,000 $1,236,000 $102,000 $1,134,000 $3,009,130 Less : Depreciation during the Quarter Total Assets Liabilities and Stockholders' Equity Current liabilities Accounts payable Dividends payable $138,000 $30,000 Stockholders' equity Common stock Retained earnings Total Liabilities and Stockholders' Equity $1,200,000 $1,641,130 $3,009,130 Budgeted Statement of Retained Earnings Retained earnings Add: Net profit Less: Dividend proposed Retained earnings $816,400 $854,730 -$30,000 $1,641,130 Accounts receivable closing balance Opening Balance Add: Sales Less: Collection Closing Balance $725,800 $4,313,000 -$4,020,400 $1,018,400 Accounts payable closing balance Opening Balance Add: Purchases Less : Payment Closing Balance $120,000 $1,278,000 -$1,260,000 $138,000