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-$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) February (actual) March (actual) April (budget) May (budget) 20,400 26,480 40,480 65,400 100,400 June (budget) July (budget) August (budget) September (budget) 50,400 30,400 28,400 25,400 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: 4% of sales Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation $ 220,000 $ 20,000 $ 110,000 $ 8,000 $ 3,200 $ 16,000

Answer 1

solution: a)sales budget Budgeted Sales in units x sale price Total Budgeted Sales April May June Quarter 65400 100400 50400 216200 121 121 12 1 2 784800 1204800 604800 2594400 b)cash collection* Feb sales march sales april sales may sales june sales total april may june Quarter 31680 31680 339360 48480 387840 156960 549360 78480 784800 240960 8433601084320 120960 120960 528000 838800 1042800 2409600 april may june 31680 339360 48480 Quarter 31680 387840 * cash collection working Feb sales=26400*12*0.1 March sales = (Apr=40400*12*0.7), (May = 40400*12*0.1) april-Sales 20% 70% 10% may- Sales 20% 70% june - Sales 20% Total Cash Collection of of of 784800 156960 784800 784800 549360 156960 549360 78480 78480 240960 of of 1204800 1204800 240960 843360 843360 of 604800 120960 120960 | 528000 838800 1042800 2409600

c)Purchase budget Budgeted unit sales Add: Desired Ending Inventory (40% of Next Month's unit sales) Total Needs april may june Quarter 65400 100400 50400 216200 40160 20160 12160 12160 105560 120560 62560 228360 Less: Beginning Inventory Required Inventory Purchase (in units) x unit cost Required Inventory Purchase (in dollars) 26160 40160 20160 26160 79400 80400 42400 202200 4.2 4.2 4.2 4.2 333480 337680 178080 849240 d)cash Disbursement for Purchase** accounts payable april Purchase may Purchase June purchase april may june Quarter 102000 102000 166740 166740 333480 168840 168840337680 89040 89040 268740 335580 257880 862200 june **working for cash Disbursement for Purchase March Purchase april Purchase april may 102,000 Quarter 102000 50% 50% of of 333480 166740 333480 166740 166740 166740 may Purchase 168840 50% 50% of of 337680 337680 168840 168840168840 june Purchase 50% of 178080 89040 89040 268740335580 257880862200 Total cash Disbursement for Purchase

april may june Quarter 76,000 52368 132396 76000 528000 838800 1042800 2409600 604000 891168 11751962485600 2 cash budget Beginning Cash Balance Add: Cash Collection Total Cash Available Less: Cash Disbursement Merchandise Purchase Advertising rent salaries sales commission (4% of sales) utilitites Equipment Purchase Cash Dividend Total Cash Disbursement Excess/Deficiency Financing: Borrowing Repayments Interest=123000*1%*3 Total Financing Ending Cash Balance 268740 335580 257880 862200 220,000 220000 220000 660000 | 20,0000 20000 20000 60000 110,000 110000 110000 330000 31392 48192 24192 103776 8,000 8000 8000 24000 0 17000 42000 59000 16500 0 0 16500 674632 758772 6820722115476 -70632 132396 493124 370124 123000 0 0 123000 0 -123000 -123000 0 -3690 -3690 123000 0 -126690 -3690 52368 132396 366434 366434