Question

EARRINGS UNLIMITED CASE 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 in pairs of earrings) January (actual) February (actual) March (actual) April (budget) May (budget) 20.000 June (budget) 26.000 July (budget) 40.000 August (budget) 65,000 September (budget) 100,000 50,000 30,000 28,000 25,000 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 $4 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.

Answer 1

Earrings Unlimited Sales Budget April 65,000 10 650,000 Budgeted Unit Sales Selling Price per unit Total Sales May 100,000 10 1,000,000 June 50,000 10 500,000 Quarter 215,000 10 2,150,000 June February Sales March Sales April Sales May Sales June Sales Total Cash Collections Earrings Unlimited Schedule of Expected Cash Collections April May 26,000 280,000 40,000 130,000 455,000 200,000 65,000 700,000 100,000 865,000 Quarter 26,000 320,000 650,000 900,000 100,000 1,996,000 436,000 695,000

Budgeted Unit Sales Add: desired Ending Inventory Inventory Total Needs Less: Beginning Merchandise Inventory Required Purchases Unit Cost Required Dollar Purchases Earrings Unlimited Merchandise Purchases Budget April 65,000 40,000 105,000 26,000 79,000 4.00 316,000 May 100,000 20,000 120,000 40,000 80,000 4.00 320,000 June 50,000 12,000 62,000 20,000 42,000 4.00 168,000 Quarter 215,000 12,000 227,000 26,000 201,000 4.00 804,000 June Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May 1 100,000 158,000 158,000 160,000 Accounts Payable April Purchases May Purchases June Purchases Total Cash Payments Quarter 100,000 316,000 320,000 84,000 820,000 160,000 84,000 244,000 258,000 318,000

May 50,000 695,000 745,000 June 50,000 865,000 915,000 Quarter 74,000 1,996,000 2,070,000 Earrings Unlimited Cash Budget April Beginning Cash Balance 74,000 Add: Collection from Customers 436,000 Total Cash Available 510,000 Less: Cash Disbursements Merchandise Purchases 258,000 Advertising 200,000 Rent 18,000 Salaries 106,000 Commissions 26,000 Utilities 7,000 Equipment Purchases Dividend Paid 15,000 Total Cash Disbursements 630,000 Excess of Cash Available Over Disbursements -120,000 Financing: Borrowings 170,000 Repayments Interest Total Financing 170,000 Ending Cash Balance 50,000 Interest = ($170,000 * 1%* 3) + ($10,000 * 1% * 2) = $5,300 318,000 200,000 18,000 106,000 40,000 7,000 16,000 244,000 200,000 18,000 106,000 20,000 7,000 40,000 820,000 600,000 54,000 318,000 86,000 21,000 56,000 15,000 1,970,000 100,000 705,000 40,000 280,000 10,000 -170,000 -5,300 -175,300 104,700 180,000 -170,000 -5,300 4,700 104,700 10,000 50,000

Earrings Unlimited Budgeted Income Statement For the Three Months ended June 30 Sales 2,150,000 104,000 804,000 48,000 860,000 86,000 1,204,000 Less: Variable expenses Beginning inventory Add: Purchases Less: Ending inventory Cost of goods sold Sales commission Contribution margin Less: Operating expenses Advertising Rent Salaries Utilities Insurance Depreciation Net Operating income Interest Expense Net Income 600,000 54,000 318,000 21,000 9,000 42,000 1,044,000 160,000 5,300 154,700