Question

I have done the first 4 parts of the questions.

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—$16 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) 21,200 27,200 41,200 66,200 101,200 June (budget) July (budget) August (budget) September (budget) 51,200 31,200 29, 200 26,200

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 $4.60 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.

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

The company plans to purchase $19,000 in new equipment during May and $46,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $19,500 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

The company maintains a minimum cash balance of $56,000. 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 $56,000 in cash.

Required:

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

2. 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 $56,000.

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

4. A budgeted balance sheet as of June 30.

Answer 1

solution: a)sales budget Budgeted Sales in units x sale price Total Budgeted Sales April May June Quarter 66200 10120051200 218600 16 16 16 16 1059200 1619200 819200 3497600 b)cash collection* Feb sales march sales april sales may sales june sales total april may june Quarter 43520 43520 461440 65920 527360 211840 741440 105920 1059200 323840 1133440 1457280| 163840 163840 716800 1131200 14032003251200 * cash collection working april may june Quarter Feb sales=27200*16*0.1 43520 43520 March sales = (Apr=41200*16*0.7), (May =41200*16*d 461440 65920 527360 april-Sales 20% of 1059200 211840 211840 70% of 1059200 741440 741440 10% of 1059200 105920 105920 may- Sales 20% of 1619200 323840 323840 70% 1619200 1133440 1133440 june - Sales 20% of 819200 163840 163840 Total Cash Collection 716800 1131200 1403200 3251200

C)Purchase budget Budgeted unit sales Add: Desired Ending Inventory (40% of Next Month's unit sales) Total Needs april may june Quarter 66200 101200 51200 218600 40480 20480 12480 12480 106680121680 63680 231080 Less: Beginning Inventory Required Inventory Purchase (in units) x unit cost Required Inventory Purchase (in dollars) 26480 40480 20480 26480 80200 81200 43200 204600 4.6 4.6 4.6 4.6 368920 373520 198720 941160 d)cash Disbursement for Purchase** accounts payable april Purchase may Purchase June purchase april may june Quarter 106000 106000 184460 184460 368920 186760 186760 373520 99360 99360 290460371220 286120 947800 may june **working for cash Disbursement for Purchase March Purchase april Purchase april 106,000 Quarter | 106000 50% 50% of of 368920 184460 368920 184460 184460 184460 may Purchase 186760 50% 50% of of 373520| 373520 186760 186760 186760 june Purchase 50% of 198720 99360 99360 290460 371220 286120 947800 Total cash Disbursement for Purchase

2)cash budget april may june Quarter Beginning Cash Balance 80,000 56472 320684 80000 Add: Cash Collection 716800 1131200 1403200 3251200 Total Cash Available | 796800 1187672 1723884 3331200 Less: Cash Disbursement Merchandise Purchase 290460 371220 286120 947800 Advertising 260,000 260000 260000 780000 rent 24,000 24000 24000 72000 salaries 118,000 118000 118000 354000 sales commission (4% of sales) 42368 64768 32768 139904 utilitites 10,000 10000 10000 30000 Equipment Purchase 19000 46000 65000 Cash Dividend 19500 0 0 19500 Total Cash Disbursement 764328 866988 776888 2408204 Excess/Deficiency 32472 320684 946996 922996 Financing: Borrowing 240000 0 24000 Repayments 0 0 -24000 24000 Interest=24000* 1%*3 0 0 -7201 -720 Total Financing | 24000 0 -24720 -720 Ending Cash Balance 56472 320684 922276 922276

3497600 1005560 139904 2352136 3.Budgeted Income statement For the three month ended June 30. sales Variable expense: Variable cost of goods sold (218600*4.6) sales commission Contribution Margin Less : fixed expense Advertising rent salaries utilitites Insurance (3600*3) Depreciation (20000*3) Net operating income Less : Interest Net income 4. Budgeted Balance sheet June 30. Current Assets Cash Account Receivable=1619200*0.1+819200*0.8 Inventory (12480* 4.6) prepaid insurance (24000-10800) Total Current Assets Property and Equipment (1010000+65000-60000) Total Assets 922276 817280 57408 13,200 1810164 1,015,000 2825164 780000 72000 354000 30000 10800 60000 | 1045336 720 1044616 99360 19500 Liabilities and Equity Account Payable (198720*0.5) dividend Equity: Common Stock Retained Earnings:*** Total Liability and Equity 920,000 1786304 2825164 ***Retained Earnings: Beginning Add : Net Income Total Less : dividend ending balance 761,188 1044616 1805804 19500 1786304