Question

A certain company sells many styles of earrings but all are sold for the same price: $16 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) 32,000 June (budget) 39,000 February (actual) 46,000 July (budget) 42,000 March (actual) 27,000 August (budget) 24,000 April (budget) 68,000 September (budget) 33,000 May (budget) 71,000

Sufficient inventory should be on hand at the end of each month to supply 30% of the earrings sold in the following month.

The company pays suppliers $8 for a pair of earrings. One‐half of a month’s purchases are 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 sales are collected as follows:

35% of a month’s sales are collected in the month of sale

55% is collected in the following month

10% is collected in the second month following sale

Monthly operating expenses for the company are given below:

Variable:
Sales Commissions 7% of sales
Fixed:
Advertising $105,000

Rent $58,000

Salaries $82,000

Utilities $24,000

Insurance $11,000

Depreciation $17,000

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

The company plans to purchase $82,000 in new equipment during May and $29,000 in new equipment during June; both purchase will be for cash. The company declares dividends of $18,000 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 $95,000

Accounts Receivable* 354,400

Inventory    163,200

Prepaid Insurance 77,000

Property and Equip (net of depreciation) 840,000

Total Assets $1,529,600

*Balance includes $73,600 in February sales and an additional $280,800 in March sales.

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts Payable $157,200

Dividends Payable 18,000

Common Stock 750,000

Retained Earnings 604,400

Total Liabilities and Stockholders’ Equity $1,529,600

The company maintains a minimum cash balance of $45,000.

The company has an agreement with a bank that allows the company to borrow cash at the beginning of each month. The interest rate on these loans is 1.50% per month and for simplicity, we will assume that interest is not compounded. All borrowing is done at the beginning of a month; any repayments are made at the end of a month; the company makes repayments in any month when the cash is available while still retaining at least $45,000 in cash. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan.

Additional Information is shown:

Sales Budget-Earrings Unlimited Particulars April May June Total Budgeted Sales units 68000 71000 39000 178000 Selling price per unit $16.00 $16.00 $16.00 $16.00 Total Sales 1,088,000.00 $1,136,000.00 S624,000.00 $2,848,000.00 solution 1b Schedule of expected cash collection - Earrings Unlimited Particulars April May June Total Cash received for Feburary Sale $73,600.00 Cash received for March Sale $237,600.00$43,200.00 Cash received for April Sale Cash received for May Sale Cash received for June Sale 73,600.00 S280,800.00 S380,800.00 $598,400.00 $108,800.00 $1,088,000.00 S397,600.00 $624,800.00 $1,022,400.00 $218,400.00 S218,400.00 Budgeted Cash Collection $692,000.00 $1,039,200.00 $952,000.00 $2,683,200.00

Required:

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

1. 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 $45,000.

2. A budgeted income statement for the three‐month period ending June 30. Use the contribution approach.

3. A budgeted balance sheet as of June 30.

Answer 1

2)cash budget Beginning Cash Balance april may june Quarter 95,000.00 692,000.00 1,039,200.00 952,000.00 2,683,200.00 787,000.00 1,084,200.00 1,029,710.60 2,778,200.00 95,000.00 45,000.00 77,710.60 ection Total Cash Available Less: Cash Disbursement Inventory Purchase Advertisin rent salaries sales commission (7% of sales utilitites Equipment Purchase 432,800.00 521,200.00 405,200.00 1,359,200.00 05,000.00 105,000.00105,000.00 315,000.00 58,000.00 174,000.00 82,000.00 246,000.00 43,680.00 199,360.00 000.00 29,000.00 111,000.00 18,000.00 795,960.00 951,720.00 746,880.00 2,494,560.00 8,960.00 132,480.00 282,830.60 283,640.00 58,000.00 82,000.00 76,160.00 24,000.00 8,000.00 82,000.00 79,520.00 24,000.00 82,000.00 24,000.00 18 Tota Excess/Deficiency Finandng Borrowing Repayments Inter Total Finandng rsemen 53,960.00 53,960.00 53,960.00 809.40 809.40 77,710.60 282,830.60282,830.60 53,960.00 809.40 54,769.40 53960 * 1 .5% 53,960.00 45,000.00 ance ENG07:56 US 12/03/2019

3.Income statement sales Variable cost Variable cost of sales commission Contribution Margin Less: fixed cost Advertisin rent salaries utilitites Insurance (11000 3) Depredation (17000*3 Income from operation Less: Interest Net income 2,848,000.00 1,424,000.00 1,224,640.00 4.Balance sheet Current Assets Cash Account Receivable624000*0.65+1136000*0.1 Inventory (12600*8) 282,830.60 519,200.00 100,800.00 44,000.00 946,830.60 900,000.00 s sold (178000*8 (7% of sales) id insurance (77000-33000 315,000.00 174,000.00 246,000.00 72,000.00 33,000.00 Total Current Assets Pro 840000+82000+29000-51000 Total Assets and Equipment 1,846,830.60 Liabilities and Equity Account Payable (319200*0.5) dividend 159,600.00 18,000.00 333,640.00 uI Common Stock Retained Earnings:*** Total Liability and Equity 332,830.60 750,000.00 919,230.60 1,846,830.60 0 **Retained Earnings: 604,400.00 937,230.60 919,230.60 nnin Add :Net Income Total Less: dividend ending balance ENG 07:56 US 12/03/2019