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
7
