Master Budget of Earrings Unlimited

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)

20,000

  June (budget)

50,000

  February (actual)

26,000

  July (budget)

30,000

  March (actual)

40,000

  August (budget)

28,000

  April (budget)

65,000

  September (budget)

25,000

  May (budget)

100,000

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.

Monthly operating expenses for the company are given below:

  Variable:
     Sales commissions 4 % of sales
  Fixed:
     Advertising

$

200,000

     Rent

$

18,000

     Salaries

$

106,000

     Utilities

$

7,000

     Insurance

$

3,000

     Depreciation

$

14,000

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.

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

  Assets   Liabilities and Stockholders’ Equity
  Cash

$

74,000

  Accounts payable

$

100,000

  Accounts receivable ($26,000 February
sales; $320,000 March sales)

346,000

  Dividends payable

15,000

  Inventory

104,000

  Capital stock

800,000

  Prepaid insurance

21,000

  Retained earnings

580,000

  Property and equipment (net)

950,000





  Total assets

$

1,495,000

  Total liabilities and stockholders’ equity

$

1,495,000





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 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 $50,000 in cash.

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

1.    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 purchase, 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 $50,000.
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.

ANSWERS AVAILABLE 

Price of Answer: Just US$ 20 only (Instant Download)

Buy Now

Need Assistance !! email us at caresolvemyquestion.com.

If you need any type of help regarding Homework, Assignments, Projects,  Case study, Essay writing etc then email us at question@solvemyquestion.com.  We will get back to you very soon.

Leave a Reply