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—$19 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)	24,000	June (budget)	54,000
February (actual)	30,000	July (budget)	34,000
March (actual)	44,000	August (budget)	32,000
April (budget)	69,000	September (budget)	29,000
May (budget)	104,000

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 $6.00 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	$	400,000
Rent	$	38,000
Salaries	$	146,000
Utilities	$	17,000
Insurance	$	5,000
Depreciation	$	34,000

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

The company plans to purchase $26,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $30,000 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	$	94,000
Accounts receivable ($57,000 February sales; $668,800 March sales)		725,800
Inventory		165,600
Prepaid insurance		31,000
Property and equipment (net)		1,150,000
Total assets	$	2,166,400
Liabilities and Stockholders’ Equity
Accounts payable	$	120,000
Dividends payable		30,000
Common stock		1,200,000
Retained earnings		816,400
Total liabilities and stockholders’ equity	$	2,166,400

The company maintains a minimum cash balance of $70,000. 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 $70,000 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 $70,000.

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

Dear student, we cannot able to post solution more than four subparts of the question as per our policy.

	January	February	March	April	May	June	July
Unit sold	24,000	30,000	44,000	69,000	104,000	54,000	34,000
Multiply: Selling price per unit	19	19	19	19	19	19	19
Budgeted Sales	456,000	570,000	836,000	1,311,000	1,976,000	1,026,000	646,000
Unit sold	24,000	30,000	44,000	69,000	104,000	54,000	34,000
Add: ending inventory (next month's unit sold*40%)	12,000	17,600	27,600	41,600	21,600	13,600	12,800
Cost of Goods available for sale		47,600	71,600	110,600	125,600	67,600	46,800
Less: beginning inventory		12,000	17,600	27,600	41,600	21,600	13,600
Budgeted purchases in units	-	35,600	54,000	83,000	84,000	46,000	33,200
Multiply: purchase price per unit		6	6	6	6	6	6
Budgeted purchases in dollars		$            213,600	$            324,000	$        498,000	$    504,000	$    276,000	$   199,200
Paid in the same month (Budgeted purchases *50%)				249,000	252,000	138,000	99,600
Paid in after month (Budgeted purchases *50%)				249,000	252,000	138,000	99,600
Sales Collection
Sales collected in same Month (sales *20%)	91,200	114,000	167,200	262,200	395,200	205,200	129,200
Sales collected after one month (sales *70%)	319,200	399,000	585,200	917,700	1,383,200	718,200	452,200
Sales collected after one month (sales *10%)	45,600	57,000	83,600	131,100	197,600	102,600	64,600

Answer 1
Sales budget
	April	May	June	Total
Unit sold	69,000	104,000	54,000	227,000
Multiply: Selling price per unit	19	19	19	19
Budgeted Sales	$        1,311,000	$         1,976,000	$         1,026,000	$     4,313,000
Answer 2
Schedule of Monthly Cash Receipts
	April	May	June	Total
From sale of February	57,000			57,000
From sale of March	585,200	83,600		668,800
From sale of April	262,200	917,700	131,100	1,311,000
From sale of May		395,200	1,383,200	1,778,400
From sale of June			205,200	205,200
Total cash receipts	$            904,400	$         1,396,500	$         1,719,500	$     4,020,400
Answer 3
Merchandise purchases budget
	April	May	June	Total
Unit sold	69,000	104,000	54,000	227,000
Add: ending inventory (next month's unit sold*40%)	41,600	21,600	13,600	13,600
Cost of Goods available for sale	110,600	125,600	67,600	240,600
Less: beginning inventory	27,600	41,600	21,600	27,600
Budgeted purchases in units	83,000	84,000	46,000	213,000
Multiply: purchase price per unit	6	6	6	6
Budgeted purchases in dollars	$            498,000	$            504,000	$            276,000	$     1,278,000
Answer 4
Schedule of Monthly Cash Disbursements
	April	May	June	Total
From Purchase of March	120,000			120,000
From Purchase of April	249,000	249,000		498,000
From Purchase of May		252,000	252,000	504,000
From Purchase of June			138,000	138,000
Total cash payament	$            369,000	$            501,000	$            390,000	$     1,260,000