Part B: Master Budget

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 a master budget for the upcoming second quarter. 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) 30,000 June (budget) 45,000
February (actual) 20,000 July (budget) 40,000
March (actual) 50,000 August (budget) 30,000
April (budget) 70,000 September (budget) 20,000
May (budget) 95,000
________________________________________

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 $3 for a pair of earrings. 40% of a month’s purchases is paid for in the month of purchase; the other 60% is paid for in the following month. All sales are on credit. 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.

Monthly operating expenses for the company are given below:

Variable:
Sales commissions 5% of sales
Fixed:
Advertising $ 190,000
Rent $ 20,000
Salaries $ 100,000
Utilities $ 8,000
Insurance $ 3,000
Depreciation $ 14,000
________________________________________

Insurance is paid on an annual basis, in November of each year.
At the end of June, the company received $4,000 deposit for July sales. Sales in advance is a liability.

The company plans to purchase $20,000 in new equipment during May and $60,000 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.

The company’s balance sheet as of March 31 is given below:

Assets
Cash $ 74,000
Accounts receivable ($20,000 February sales; $350,000 March sales) 370,000
Inventory 80,000
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
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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 schedules: Use the formats/tables below. Any other format is unacceptable. Below each table, show how you arrived at the numbers in your tables. Lack of detailed calculations will reduce your marks even if the answers are correct.

1. a. A sales budget, by month and in total.

Sales Budget
April May June Quarter
Budgeted unit sales
Selling price per unit
Total sales

b. A schedule of expected cash collections, by month and in total.

Earrings Unlimited
Schedule of Expected Cash Collections
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. Show the budget by month and in total.

Earrings Unlimited
Merchandise Purchases Budget
April May June Quarter
Budgeted unit sales
Add: Desired ending merchandise inventory
Total needs
Less: Beginning merchandise inventory
Required purchases
Unit cost
Required dollar purchases

d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

Earrings Unlimited
Budgeted Cash Disbursements for Merchandise Purchases
April May June Quarter
Accounts payable
April purchases
May purchases
June purchases
Total cash payments

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.

Earrings Unlimited
Cash Budget
For the Three Months Ending June 30
April May June Quarter Quarter
Beginning cash balance $74,000
Add collections from customers 1,996,000
Total cash available 2,070,000
Less cash disbursements:
Merchandise purchases 820,000
Advertising 600,000
Rent 54,000
Salaries 318,000
Commissions 86,000
Utilities 21,000
Equipment purchases 56,000
Dividends paid 15,000
Total cash disbursements 1,970,000
Excess (deficiency) of cash available over disbursements 100,000
Financing:
Borrowings 180,000
Repayments (180,000)
Interest (5,300)
Total financing (5,300)
Ending cash balance $94,700

• Required 1D

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

Earrings Unlimited
Budgeted Income Statement
For the Three Months Ended June 30
Sales
Variable expenses:
Cost of goods sold
Commissions

Contribution margin
Fixed expenses:
Advertising
Rent
Salaries
Utilities
Insurance
Depreciation

Net operating income
Interest expense
Net income

4. A budgeted balance sheet as of June 30.

Earrings Unlimited
Budgeted Balance Sheet
June 30
Assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Property and equipment, net

Total assets
Liabilities and Stockholders’ Equity
Accounts payable
Dividends payable
Common stock
Retained earnings

Total liabilities and stockholders’ equity