Question

The company sells many styles of earrings, but all are sold for the same price—$12 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)	20,400	June (budget)	50,400
February (actual)	26,400	July (budget)	30,400
March (actual)	40,400	August (budget)	28,400
April (budget)	65,400	September (budget)	25,400
May (budget)	100,400

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 $4.20 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	$	220,000
Rent	$	20,000
Salaries	$	110,000
Utilities	$	8,000
Insurance	$	3,200
Depreciation	$	16,000

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

The company plans to purchase $17,000 in new equipment during May and $42,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $16,500 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	$	76,000
Accounts receivable ($31,680 February sales; $387,840 March sales)		419,520
Inventory		109,872
Prepaid insurance		22,000
Property and equipment (net)		970,000
Total assets	$	1,597,392
Liabilities and Stockholders’ Equity
Accounts payable	$	102,000
Dividends payable		16,500
Common stock		840,000
Retained earnings		638,892
Total liabilities and stockholders’ equity	$	1,597,392

The company maintains a minimum cash balance of $52,000. 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 $52,000 in cash.

Required:

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

1. 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.

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 $52,000.

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

Part 1 A

Sales budget

	April	May	June	Quarter
Budgeted unit sales	65400	100400	50400	216200
Selling price per unit	12	12	12	12
Total sales	$784800	$1204800	$604800	$2594400

Part 1 B

Schedule of Expected Cash Collections:

	April	May	June	Quarter
February sales (26400*12=316800)*10%	31680			31680
March sales (40400*12=484800)*70%, 10%	339360	48480		387840
April sales 784800*20%, 70%, 10%	156960	549360	78480	784800
May sales 1204800*20%, 70%		240960	843960	1084920
June sales 604800*20%			120960	120960
Total Cash Collections	$528000	$838800	$1043400	$2410200

Part 1 C

Merchandise Purchases Budget:

	April	May	June	Quarter
Budgeted unit sales	65400	100400	50400	216200
Plus: desired ending inventory (40%)	40160	20160	12160	12160
Total needs	105560	120560	62560	228360
Minus: Beginning inventory	26160	40160	20160	26160
Required to purchase	79400	80400	42400	202200
Cost of purchase @$4.20 /unit	$333480	$337680	$178080	$849240

Desired Ending Inventory: 40% of the next month's unit sale

Part 1 D

Budgeted cash disbursements for merchandise purchases:

	April	May	June	Quarter
Accounts payable	102000			102000
April purchases	166740	166740		333480
May purchases		168840	168840	337680
June purchases			89040	89040
Total cash payments	$268740	$335580	$257880	$862200

Part 2

CASH BUDGET FOR THE THREE MONTHS ENDING JUNE 30
	April	May	June	Quarter
Cash balance (beginning)	76000	52368	72396	76000
Plus: collections from customer	528000	838800	1043400	2410200
Total cash balance	604000	891168	1115796	2486200
Minus: disbursements
Merchandise purchases	268740	335580	257880	862200
Advertising	220000	280000	280000	780000
Rent	20000	20000	20000	60000
Salaries	110000	110000	110000	330000
Commissions (4% of sales)	31392	48192	24192	103776
Utilities	8000	8000	8000	24000
Equipment purchases	0	17000	42000	59000
Dividends paid	16500	0	0	16500
Total disbursements	674632	818772	742072	2235476
Excess (deficiency) of receipts over disbursement	-70632	72396	373724	250724
Financing:
Borrowings	123000			123000
Repayments			-123000	-123000
Interests			-3690	-3690
Total financing	123000		-126690	-3690
Cash balance ending	52368	72396	247034	247034

Part 3

BUDGETED INCOME STATEMENT FOR THE THREE MONTHS ENDED JUNE 30
Sales in units		216200
Sales		2594400
Variable expenses:
Cost of goods sold (109872+849240-51072)	908040
Commissions	103776	1011816
Contribution margin		1582584
Fixed expenses:
Advertising	780000
Rent	60000
Salaries	330000
Utilities	24000
Insurance	9600
Depreciations	48000	1251600
Net operating income		330984
Minus: interest expense		3690
Net income		327294

Part 4

BUDGETED BALANCE SHEET JUNE 30
Assets:
Cash	247034
Accounts receivable (1204800*10%)+(604800*80%)	604320
Inventory (12160*4.20)	51072
Prepaid insurance (22000-9600)	12400
Property and equipment, net (970000+59000-48000)	981000
Total assets	1895826
Liabilities and equity:
Accounts payable, purchases	89040
Dividends payable	16500
Capital stock, no par	840000
Retained earnings	950286
Total liabilities and equity	1895826
Accounts receivable at June 30:
May sales (1204800*10%)	120480
June sales (604800*80%)	483840
Total	604320
Retained earnings at June 30:
Balance, March 31	638892
Plus: net income	327294
Total	966186
Minus: dividends declared	16500
Balance June 30	949686