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manny1070
May 1, 2013, 04:18 PM
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) 21,500 June (budget) 51,500
February (actual) 27,500 July (budget) 31,500
March (actual) 41,500 August (budget) 29,500
April (budget) 66,500 September (budget) 26,500
May (budget) 101,500

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 30% 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 30% of a month's sales are collected in the month of sale. An additional 60% 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 $ 198,500
Rent $ 16,500
Salaries $ 104,500
Utilities $ 5,500
Insurance $ 1,500
Depreciation $ 12,500

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

The company plans to purchase $14,700 in new equipment during May and $38,500 in new equipment during June; both purchases will be for cash. The company declares dividends of $12,500 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 Liabilities and Stockholders' Equity
Cash $ 65,300 Accounts payable $ 98,000
Accounts receivable ($27,500 February
sales; $290,500 March sales) 318,000 Dividends payable 12,500
Inventory 79,800 Capital stock 950,000
Prepaid insurance 22,500 Retained earnings 595,000
Property and equipment (net) 1,169,900


Total assets $ 1,655,500 Total liabilities and stockholders' equity $ 1,655,500



The company maintains a minimum cash balance of $60,000. 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 $60,000 in cash.

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

Requirement 1:
(a) A sales budget, by month and in total. (Omit the "$" sign in your response.)

April May June Quarter
Budgeted sales in units
Selling price per unit $ $ $ $

Total sales $ $ $ $


(b)
A schedule of expected cash collections from sales, by month and in total. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

April May June Quarter
February sales $ $ $ $
March sales
April sales
May sales
June sales

Total cash collections $ $ $ $


(c) A merchandise purchases budget in units and in dollars. (Omit the "$" sign in your response.)

April May June Quarter
Required unit purchases
Required dollar purchases $ $ $ $

(d)
A schedule of expected cash disbursements for merchandise purchases, by month and in total. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

April May June Quarter
Accounts payable $ $ $ $
April purchases
May purchases
June purchases

Total cash payments $ $ $ $


Requirement 2:
A cash budget. Show the budget by month and in total. (Leave no cells blank - be certain to enter "0" wherever required. Deficiencies, repayments and interest should be preceded by a minus sign when appropriate. Total financing should be preceded by a minus sign when it consist of repayments and interest. Omit the "$" sign in your response.)

Earrings Unlimited
Cash Budget
For the Three Months Ending June 30
April May June Quarter
Total cash available $ $ $ $

Less disbursements:









Total disbursements

Excess (deficiency) of receipts over
disbursements

Financing:




Total financing

Cash balance, ending $ $ $ $


Requirement 3:
A budgeted income statement for the three-month period ending June 30. Use the contribution approach. (Input the amount as positive value. Omit the "$" sign in your response.)

Earrings Unlimited
Budgeted Income Statement
For the Three Months Ended June 30
$
Variable expenses:
$


Contribution margin
Fixed expenses:








:

$


Requirement 4:
A budgeted balance sheet as of June 30. (Omit the "$" sign in your response.)

Earrings Unlimited
Budgeted Balance Sheet
June 30
Assets Liabilities and Stockholders' Equity
$ $






Total assets $ Total liabilities and Stockholders' equity $