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.

Selected items from the company’s March 31 balance sheet are as follows:

Cash	$	90,000
Accounts receivable ($58,400 February sales; $691,200 March sales)		749,600
Inventory		152,768
Accounts payable		116,000
Dividends payable		27,000

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:

a. A sales budget, by month and in total.

    b. A schedule of expected cash collections, by month and in total.

    c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

    d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

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.

Answer 1

Earrings Unlimited Sales Budget April 68,200 20 1,364,000 May | 103,200 June 53,200 Budgeted Unit Sales Selling Price per unit Total Sales Quarter 224,600 20 4,492,000 20 20 2,064,000 1,064,000 June February Sales March Sales April Sales May Sales June Sales Total Cash Collections Earrings Unlimited Schedule of Expected Cash Collections April May 58,400 604,800 86,400 272,800 954,800 412,800 136,400 1,444,800 212,800 1,794,000 Quarter 58,400 691,200 1,364,000 1,857,600 212,800 4,184,000 936,000 1,454,000

Earrings Unlimited Merchandise Purchases Budget April May Budgeted Sales in Units 68,200 103,200 Add: Desired Ending Inventory in unit 41,280 21,280 Total Needs 109,480 124,480 Less: Beginning Inventory in Unit 27,280 41,280 Required Purchases in Unit 82,200 83,200 Unit Cost 5.60 5.60 Cost of Purchases 460,320 465,920 Ending Inventory, June = 33,200 * 40% = 13,280 Units June 53,200 13,280 66,480 21,280 45,200 5.60 253,120 Quarter Quar 224,600 13,280 237,880 27,280 210,600 5.60 1,179,360 Accounts Payable April Purchases May Purchases June Purchases Total Cash Payments Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June 116,000 230,160 230,160 232,960 232,960 126,560 346,160 463,120 359,520 | Quarter 116,000 460,320 465,920 126,560 1,168,800

June Earrings Unlimited Cash Budget April 90,000 936,000 1,026,000 May 66,280 1,454,000 1,520,280 403,600 1,794,000 2,197,600 Quarter 90,000 4,184,000 4,274,000 346,160 360,000 34,000 138,000 54,560 15,000 Beginning Cash Balance Add: Cash Collections Total Cash Available Less: Cash Disbursements Merchandise Purchases Advertising Rent Salaries Commissions Utilities Equipment Purchases Dividend Paid Total Cash Disbursements Excess (Deficiency) of Cash Financing: Borrowings Repayments Interest ($15,000 * 1% *3) Total Financing Ending Cash Balance 463,120 360,000 34,000 138,000 82,560 15,000 24,000 359,520 360,000 34,000 138,000 42,560 15,000 56,000 1,168,800 1,080,000 102,000 414,000 179,680 45,000 80,000 27.000 3,096,480 1,177,520 27,000 974,720 51,280 1,116,680 403,600 1,005,080 1,192,520 15,000 -15,000 -450 -15,450 1,177,070 15,000 -15,000 -450 -450 1,177,070 15,000 66,280 403,600