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—$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow
| January (Actual) | 200000 |
| February (Actual) | 260000 |
| March (Actual) | 400000 |
| April (Budget) | 65000 |
| May (Budget) | 100000 |
| June (Budget) | 50000 |
| July (budget) | 30000 |
| August (Budget) | 28000 |
| September (Budget) | 25000 |
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 for each bracelet. 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.. 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 Expenses | |
| Sales Commissions | 4% of Sales |
| Fixed expenses | |
| Advertising | 200000 |
| Rent | 18000 |
| Salaries | 106000 |
| Utilities | 7000 |
| Insurance | 3000 |
| Depreciation | 14000 |
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.
Other relevant data is given below:
Cash Balance as of march 31 74000
Inventory balance as of March 31 104000
Merchandise purchases for March 200000
The company maintains a minimum cash balance of $50,000. 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 the exact number amount needed 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 accured interest on the loan and as much of the loan as possible while still retaining at least $50,000 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.
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 $50000
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| Earrings Unlimited | Note | |||||||
| Sales Budget | February | March | April | May | June | April- Jun Qtr. | ||
| Sales (units) | 260,000.00 | 400,000.00 | 65,000.00 | 100,000.00 | 50,000.00 | 215,000.00 | A | |
| Sell Price | 10.00 | 10.00 | 10.00 | 10.00 | 10.00 | B | ||
| Sales Budget | 2,600,000.00 | 4,000,000.00 | 650,000.00 | 1,000,000.00 | 500,000.00 | 2,150,000.00 | C=A*B | |
| Collection Budget | February | March | April | May | June | April- Jun Qtr. | ||
| Sales Budget | 2,600,000.00 | 4,000,000.00 | 650,000.00 | 1,000,000.00 | 500,000.00 | 2,150,000.00 | See C | |
| 20% collected in same month | 130,000.00 | 200,000.00 | 100,000.00 | 430,000.00 | D= C*20% | |||
| 70% collected in next month | 2,800,000.00 | 455,000.00 | 700,000.00 | 3,955,000.00 | E= 70% of C of previous month | |||
| 10% collected in second month | 260,000.00 | 400,000.00 | 65,000.00 | 725,000.00 | F= 10% of C of previous to previous month | |||
| Expected cash collections | 3,190,000.00 | 1,055,000.00 | 865,000.00 | 5,110,000.00 | G=D+E+F | |||
| Purchase Budget | April | May | June | April- Jun Qtr. | July | |||
| Sales (units) | 65,000.00 | 100,000.00 | 50,000.00 | 215,000.00 | 30,000.00 | See A | ||
| Add: Desired Ending Inventory | 40,000.00 | 20,000.00 | 12,000.00 | H= 40% of A of next month | ||||
| Total bracelet needed | 105,000.00 | 120,000.00 | 62,000.00 | I= A+H | ||||
| Less: Expected Beginning Inventory | 26,000.00 | 40,000.00 | 20,000.00 | J= 40% of A | ||||
| Bracelet Purchase Budget | 79,000.00 | 80,000.00 | 42,000.00 | 201,000.00 | K=I-J | |||
| Payment Budget | March | April | May | June | April- Jun Qtr. | |||
| Bracelet Purchase Budget | 79,000.00 | 80,000.00 | 42,000.00 | 201,000.00 | See K | |||
| Purchase price | 4.00 | 4.00 | 4.00 | L | ||||
| Purchase cost | 200,000.00 | 316,000.00 | 320,000.00 | 168,000.00 | 804,000.00 | M=K*L | ||
| 50% paid in same month | 158,000.00 | 160,000.00 | 84,000.00 | 402,000.00 | N= M*50% | |||
| 50% paid in next month | 100,000.00 | 158,000.00 | 160,000.00 | 418,000.00 | O= 50% of M of previous month | |||
| Cash disbursements for merchandise purchases | 258,000.00 | 318,000.00 | 244,000.00 | 820,000.00 | P=N+O | |||
| Sales Commission Budget | April | May | June | April- Jun Qtr. | ||||
| Sales Budget | 650,000.00 | 1,000,000.00 | 500,000.00 | 2,150,000.00 | See C | |||
| Sales Commission @ 4% | 26,000.00 | 40,000.00 | 20,000.00 | 86,000.00 | Q= C*4% | |||
| Cash budget | April | May | June | April- Jun Qtr. | ||||
| Expected cash collections | 3,190,000.00 | 1,055,000.00 | 865,000.00 | 5,110,000.00 | See P | |||
| Total Cash Receipts | 3,190,000.00 | 1,055,000.00 | 865,000.00 | |||||
| Estimated cash payments for | ||||||||
| Merchandise purchases | 258,000.00 | 318,000.00 | 244,000.00 | 820,000.00 | ||||
| Sales Commission | 26,000.00 | 40,000.00 | 20,000.00 | 86,000.00 | ||||
| Advertising | 200,000.00 | 200,000.00 | 200,000.00 | 600,000.00 | ||||
| Rent | 18,000.00 | 18,000.00 | 18,000.00 | 54,000.00 | ||||
| Wages and Salaries | 106,000.00 | 106,000.00 | 106,000.00 | 318,000.00 | ||||
| Utilities | 7,000.00 | 7,000.00 | 7,000.00 | 21,000.00 | ||||
| New equipment | 16,000.00 | 40,000.00 | 56,000.00 | |||||
| Dividends | 15,000.00 | 15,000.00 | ||||||
| Total cash payments | 630,000.00 | 705,000.00 | 635,000.00 | 1,970,000.00 | ||||
| Cash increase or (decrease) | 2,560,000.00 | 350,000.00 | 230,000.00 | |||||
| Cash Balance at the beginning of month | 74,000.00 | 2,634,000.00 | 2,984,000.00 | |||||
| Cash Balance at the end of month | 2,634,000.00 | 2,984,000.00 | 3,214,000.00 | |||||
| As cash Balance at the end of month is more than $ 50,000 so borrowing is not required. | ||||||||
| Depreciation is a non cash expense so not considered. | ||||||||
| Insurance is paid on an annual basis, in November of each year so not considered. | ||||||||
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...