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 comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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—$15 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)	22,200	June (budget)	52,200
February (actual)	28,200	July (budget)	32,200
March (actual)	42,200	August (budget)	30,200
April (budget)	67,200	September (budget)	27,200
May (budget)	102,200

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 $5.1 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, with no discount, and payable within 15 days. The company has found, however, that 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	$	310,000
Rent	$	29,000
Salaries	$	128,000
Utilities	$	12,500
Insurance	$	4,100
Depreciation	$	25,000

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

The company plans to purchase $21,500 in new equipment during May and $51,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $23,250 each quarter, payable in the first month of the following quarter.

A listing of the company’s ledger accounts as of March 31 is given below:

Assets
Cash	$	85,000
Accounts receivable ($42,300 February sales;    $506,400 March sales)		548,700
Inventory		137,088
Prepaid insurance		26,500
Property and equipment (net)		1,060,000
Total assets	$	1,857,288
Liabilities and Stockholders’ Equity
Accounts payable	$	111,000
Dividends payable		23,250
Common stock		1,020,000
Retained earnings		703,038
Total liabilities and stockholders’ equity	$	1,857,288

The company maintains a minimum cash balance of $61,000. 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 $61,000 in cash.

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

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

               

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

               

c.	A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round "Unit cost" answers to 2 decimal places.)

               

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 $61,000 (Cash deficiency, repayments and interest should be indicated by a minus sign.)

        

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

1 (a) Sales budget:

	April	May	June	Quarter
Budgeted unit sales	67200	102200	52200	221600
Selling price per unit	15	15	15	15
Budgeted sales	1008000	1533000	783000	3324000

(b) Schedule of expected cash collections:

	February	March	April	May	June	Quarter 2
Budgeted unit sales	28200	42200	67200	102200	52200
Selling price per unit	15	15	15	15	15
Budgeted sales	423000	633000	1008000	1533000	783000
Cash collections:
First month (20%)			201600	306600	156600	664800
Second month (70%)			443100	705600	1073100	2221800
Third month (10%)			42300	63300	100800	206400
Total cash collections			687000	1075500	1330500	3093000

1 (c) Purchase budget:

	March	April	May	June	July	Quarter 2
Budgeted unit sales	42200	67200	102200	52200	32200	221600
Add: Desired closing inventory(40% of next month sales)	26880	40880	20880	12880		74640
Units needed	69080	108080	123080	65080		296240
Less:Opening inventory		26880	40880	20880		88640
Budgeted unit purchases		81200	82200	44200		207600
Unit price		5.1	5.1	5.1		5.1
Budgeted purchases		414120	419220	225420		1058760

1 (d) Expected cash disbursements:

	April	May	June	Quarter 2
Budgeted purchases	414120	419220	225420	1058760
Cash payments:
First month (50%)	207060	209610	112710	529380
Second month(50%)	111000	207060	209610	527670
Total cash payments	318060	416670	322320	1057050