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-$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) 23,480 June (budget) 29,400 July (budget) 43,400 August (budget) 68,400 September (budget) 103,400 53,400 33,400 31,400 28,400 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 $5.70 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 $ 370,000 $ 35,000 $ 140,000 $ 15,500 $ 4,700 $ 31,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $24,500 in new equipment during May and $57,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,750 each quarter, payable in the first month of the following quarter.

Answer 1

Answer 1.

| Quarter Budgeted Unit Sales Selling Price per unit Total Sales Sales Budget April 68400 16.00 1094400 May 103400 16.00 1654400 June 53400 16.00 854400 | 225200 16.00 3603200 June February Sales March Sales April Sales May Sales June Sales Total Cash Collections Earrings Unlimited Schedule of Expected Cash Collections April May 47040 486080 69440 218880 766080 330880 109440 1158080 170880 1438400 Quarter 47040 555520 1094400 1488960 170880 3356800 752000 1166400

Earrings Unlimited Merchandise Purchases Budget April May Budgeted Unit Sales 68400 103400 Add: desired Ending Inventory Inventory 41360 21360 Total Needs 109 760 124 760 Less: Beginning Merchandise Inventory 27360 41360 Required Purchases 82400 83400 Unit Cost 5.70 5.70 Required Dollar Purchases 469680 4 75380 June 53400 13360 66760 21360 45400 5.70 258780 Quarter 225200 13360 238560 27360 211200 5.70 1203840 Quarter 117000 Accounts Payable April Purchases May Purchases June Purchases Total Cash Payments Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June 117000 234840 234840 237690 237690 129390 351840 472530 367080 469680 475380 129390 1191450

Answer 2.

| May 67134 1166400 1233534 June 109828 1438400 1548228 Quarter 91000 3356800 3447800 Earrings Unlimited Cash Budget April Beginning Cash Balance 91000 Add: Collection from Customers 752000 Total Cash Available 843000 Less: Cash Disbursements Merchandise Purchases 351840 Advertising 370000 Rent 35000 Salaries 140000 Commissions 43776 Utilities 15500 Equipment Purchases 0 Dividend Paid 27750 Total Cash Disbursements 983866 Excess of Cash Available Over Disbursements -140866 Financing: Borrowings 208000 Repayments 0 Interest 0 Total Financing 208000 Ending Cash Balance 67134 Interest = $208,000 * 1% * 3 = $6,240 472530 370000 35000 140000 66176 15500 24500 367080 370000 35000 140000 34176 15500 57000 1191450 1110000 105000 420000 144128 46500 81500 27750 3126328 321472 | 1123706 109828 1018756 529472 | 0 -208000 -6240 -214240 315232 208000 -208000 -6240 -6240 315232 0 109828 L

Answer 3.

3603 200 1427768 2175432 Earrings Unlimited Budgeted Income Statement For the Three Months ended June 30 Sales Less: Variable expenses Cost of goods sold 1283640 Sales commission 144128 Contribution margin Less: Fixed expenses Advertising 1110000 Rent 105000 Salaries 420000 Utilities 46500 Insurance 14100 Depreciation 93000 Net Operating income Interest Expense Net income 1788600 386832 6240 380592

Answer 4.

315232 848960 Earrings Unlimited Budgeted Balance Sheet June 30 Assets Cash Accounts Receivable (May sales $165,440; June sales $683,520) Inventory Prepaid insurance Property, plant and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable Common Stock Retained earnings Total liabilities and stockholder's equity 76152 15400 1108500 2364244 129390 27750 1140000 1067104 2364244