You have just been hired as a new management trainee by Earrings Unlimited, a distributor of ear- rings 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 Cash . . . . . . . . . . . . . . . . . . . . . $ 74,000
Accounts receivable ($26,000 February sales; $320,000 March sales) . . . . .. . . . . . . . 346,000
Inventory. . . . . . . . . . . . . . . . . . 104,000
Prepaid insurance . . . . . . . . . . . . . 21,000
Property and equipment (net) . . . . . . . . 950,000
Total assets . . . . . . . . . . . . . . . $1,495,000
Liabilities and stockholders’ Equity
Accounts payable . . . . . . . . . . . .. $100,000
Dividends payable . . . . . . . . . . . . 15,000
Common stock . . . . . . . . . . . . . . . 800,000
Retained earnings . . . . . . . . . . . . . 580,000
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. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
- A budgeted Income statement for the three month period ending June 30. Use the contribution approach
| EARRINGS UNLIMITED | ||||||
| SALES BUDGET: | ||||||
| April | May | June | Quarter | |||
| Budgeted unit sales | 65,000 | 100,000 | 50,000 | 215,000 | ||
| Selling price per unit | 10 | 10 | 10 | 10 | ||
| Total Sales | 650,000 | 1,000,000 | 500,000 | 2,150,000 | ||
2
| EARRINGS UNLIMITED | ||||||
| SCHEDULE OF EXPECTED CASH COLLECTIONS: | ||||||
| April | May | June | Quarter | |||
| February sales | 10% | 26,000 | 26,000 | |||
| March sales | 70% | 10% | 280,000 | 40,000 | 320,000 | |
| April sales (20%) | 70% | 10% | 130,000 | 455,000 | 65,000 | 650,000 |
| May sales | 20% | 70% | 200,000 | 700,000 | 900,000 | |
| June sales | 20% | 100,000 | 100,000 | |||
| Total Cash Collections | 436,000 | 695,000 | 865,000 | 1,996,000 | ||
3
| EARRINGS UNLIMITED | ||||||
| MERCHANDISE PURCHASES BUDGET: | ||||||
| April | May | June | Quarter | |||
| Budgeted unit sales | 65,000 | 100,000 | 50,000 | 215,000 | ||
| Add desired ending inventory | 40% | 40,000 | 20,000 | 12,000 | 12,000 | |
| Total needs | 105,000 | 120,000 | 62,000 | 227,000 | ||
| Less beginning inventory | 26,000 | 40,000 | 20,000 | 26,000 | ||
| Required purchases | 79,000 | 80,000 | 42,000 | 201,000 | ||
| Cost of purchases @ $4 per unit | $316,000 | $320,000 | $168,000 | $804,000 | ||
| Desired Ending Inventory: 40% of the next month’s unit sale | ||||||
4
| EARRINGS UNLIMITED | ||||||
| BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES: | ||||||
| April | May | June | Quarter | |||
| Accounts payable | given | $100,000 | 100,000 | |||
| April purchases | 50% | 158,000 | $158,000 | 316,000 | ||
| May purchases | 50% | 160,000 | $160,000 | 320,000 | ||
| June purchases | 50% | 84,000 | 84,000 | |||
| Total cash payments | 258,000 | 318,000 | 244,000 | 820,000 | ||
5
| EARRINGS UNLIMITED | ||||||
| CASH BUDGET | ||||||
| FOR THE THREE MONTHS ENDING JUNE 30 | ||||||
| April | May | June | Quarter | |||
| Cash balance | 74,000 | 50,000 | 50,000 | 74,000 | ||
| Add collections from customers | 436,000 | 695,000 | 865,000 | 1,996,000 | ||
| Total cash available | 510,000 | 745,000 | 915,000 | 2,070,000 | ||
| Less Disbursements | ||||||
| Merchandise purchases | 258,000 | 318,000 | 244,000 | 820,000 | ||
| Advertising | 200,000 | 200,000 | 200,000 | 600,000 | ||
| Rent | 18,000 | 18,000 | 18,000 | 54,000 | ||
| Salaries | 106,000 | 106,000 | 106,000 | 318,000 | ||
| Commissions | 26,000 | 40,000 | 20,000 | 86,000 | ||
| Utilities | 7,000 | 7,000 | 7,000 | 21,000 | ||
| Equipment purchases | given | – | 16,000 | 40,000 | 56,000 | |
| Dividends paid | 15,000 | 15,000 | ||||
| Total Disbursements | 630,000 | 705,000 | 635,000 | 1,970,000 | ||
| Excess (deficiency) of receipts | (120,000) | 40,000 | 280,000 | 100,000 | ||
| over disbursements | ||||||
| Financing: | ||||||
| Borrowings | 170,000 | 10,000 | 180,000 | |||
| Repayments | (180,000) | (180,000) | ||||
| Interest | * | (5,300) | (5,300) | |||
| Total financing | 170,000 | 10,000 | (185,300) | (5,300) | ||
| Cash balance, ending | 50,000 | 50,000 | 94,700 | 94,700 | ||
| Principal | Interest Rate | Months | ||||
| * | 170,000 | x | 1% | x | 3 | 5,100 |
| 10,000 | x | 1% | x | 2 | 200 | |
| Total interest | 5,300 | |||||
6
| EARRINGS UNLIMITED | ||||||
| BUDGETED INCOME STATEMENT | ||||||
| FOR THE THREE MONTHS ENDED JUNE 30 | ||||||
| Sales | $2,150,000 | |||||
| Variable expenses: | ||||||
| Cost of goods sold @ | $4 | per unit | 860,000 | |||
| Commissions | 4% | 86,000 | 946,000 | |||
| Contribution Margin | 1,204,000 | |||||
| Fixed expenses: | ||||||
| Advertising | 600,000 | |||||
| Rent | 54,000 | |||||
| Salaries | 318,000 | |||||
| Utilities | 21,000 | |||||
| Insurance | 9,000 | |||||
| Depreciation | $14,000.00 | x | 3 | 42,000 | 1,044,000 | |
| Net operating income | 160,000 | |||||
| Interest expense | (5,300) | |||||
| Net income | $154,700 | |||||
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