You have just been hired as a newmanagement trainee by Earrings Unlimited, a distributor of earringsto various retail outlets located in shopping malls across thecountry. In the past, the company has done very little in the wayof budgeting and at certain times of the year has experienced ashortage of cash.
Since you are well trained inbudgeting, you have decided to prepare comprehensive budgets forthe upcoming second quarter in order to show management thebenefits that can be gained from an integrated budgeting program.To this end, you have worked with accounting and other areas togather the information assembled below.
The company sells many styles ofearrings, but all are sold for the same priceââ¬â$10 per pair.Actual sales of earrings for the last three months and budgetedsales 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 beforeand during May is due to Mother's Day. Sufficient inventory shouldbe on hand at the end of each month to supply 30% of the earringssold in the following month.
Suppliers are paid $4 for a pair ofearrings. One-half of a month's purchases is paid for in the monthof purchase; the other half is paid for in the following month. Allsales are on credit, with no discount, and payable within 15 days.The company has found, however, that only 30% of a month's salesare collected in the month of sale. An additional 60% is collectedin the following month, and the remaining 10% is collected in thesecond month following sale. Bad debts have been negligible.
Monthlyoperating expenses for the company are given below:
Variable: Salescommissions 4 % of sales Fixed: Advertising $ 198,500 Rent $ 16,500 Salaries $ 104,500 Utilities $ 5,500 Insurance $ 1,500 Depreciation $ 12,500
Insurance ispaid on an annual basis, in November of each year. The companyplans to purchase $14,700 in new equipment during May and $38,500in new equipment during June; both purchases will be for cash. Thecompany declares dividends of $12,500 each quarter, payable in thefirst month of the following quarter. A listing of thecompany's ledger accounts as of March 31 is given below:
Assets Liabilities and Stockholders' Equity Cash $ 65,300 Accountspayable $ 98,000 Accountsreceivable ($27,500 February
sales; $290,500 March sales) 318,000 Dividendspayable 12,500 Inventory 79,800 Capitalstock 950,000 Prepaidinsurance 22,500 Retainedearnings 595,000 Property andequipment (net) 1,169,900
Totalassets $ 1,655,500 Totalliabilities and stockholders' equity $ 1,655,500
The company maintains a minimum cashbalance of $60,000. All borrowing is done at the beginning of amonth; any repayments are made at the end of a month.
The company has an agreement with abank that allows the company to borrow in increments of $1,000 atthe beginning of each month. The interest rate on these loans is 1%per month and for simplicity we will assume that interest is notcompounded. At the end of the quarter, the company would pay thebank all of the accumulated interest on the loan and as much of theloan as possible (in increments of $1,000), while still retainingat least $60,000 in cash.
2nd part to follow:
You have just been hired as a newmanagement trainee by Earrings Unlimited, a distributor of earringsto various retail outlets located in shopping malls across thecountry. In the past, the company has done very little in the wayof budgeting and at certain times of the year has experienced ashortage of cash.
Since you are well trained inbudgeting, you have decided to prepare comprehensive budgets forthe upcoming second quarter in order to show management thebenefits that can be gained from an integrated budgeting program.To this end, you have worked with accounting and other areas togather the information assembled below. |
The company sells many styles ofearrings, but all are sold for the same priceââ¬â$10 per pair.Actual sales of earrings for the last three months and budgetedsales 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 beforeand during May is due to Mother's Day. Sufficient inventory shouldbe on hand at the end of each month to supply 30% of the earringssold in the following month. |
Suppliers are paid $4 for a pair ofearrings. One-half of a month's purchases is paid for in the monthof purchase; the other half is paid for in the following month. Allsales are on credit, with no discount, and payable within 15 days.The company has found, however, that only 30% of a month's salesare collected in the month of sale. An additional 60% is collectedin the following month, and the remaining 10% is collected in thesecond month following sale. Bad debts have been negligible. |
| Monthlyoperating expenses for the company are given below: |
| Variable: | ||
| Salescommissions | 4 | % of sales |
| Fixed: | ||
| Advertising | $ | 198,500 |
| Rent | $ | 16,500 |
| Salaries | $ | 104,500 |
| Utilities | $ | 5,500 |
| Insurance | $ | 1,500 |
| Depreciation | $ | 12,500 |
| Insurance ispaid on an annual basis, in November of each year. |
| The companyplans to purchase $14,700 in new equipment during May and $38,500in new equipment during June; both purchases will be for cash. Thecompany declares dividends of $12,500 each quarter, payable in thefirst month of the following quarter. |
| A listing of thecompany's ledger accounts as of March 31 is given below: |
| Assets | Liabilities and Stockholders' Equity | ||||
| Cash | $ | 65,300 | Accountspayable | $ | 98,000 |
| Accountsreceivable ($27,500 February sales; $290,500 March sales) | 318,000 | Dividendspayable | 12,500 | ||
| Inventory | 79,800 | Capitalstock | 950,000 | ||
| Prepaidinsurance | 22,500 | Retainedearnings | 595,000 | ||
| Property andequipment (net) | 1,169,900 | ||||
| Totalassets | $ | 1,655,500 | Totalliabilities and stockholders' equity | $ | 1,655,500 |
The company maintains a minimum cashbalance of $60,000. All borrowing is done at the beginning of amonth; any repayments are made at the end of a month. |
The company has an agreement with abank that allows the company to borrow in increments of $1,000 atthe beginning of each month. The interest rate on these loans is 1%per month and for simplicity we will assume that interest is notcompounded. At the end of the quarter, the company would pay thebank all of the accumulated interest on the loan and as much of theloan as possible (in increments of $1,000), while still retainingat least $60,000 in cash. |
2nd part to follow:
Related questions
You have just been hired as a new management trainee by EarringsUnlimited, a distributor of earrings to various retail outletslocated in shopping malls across the country. In the past, thecompany has done very little in the way of budgeting and at certaintimes of the year has experienced a shortage of cash. |
Since you are well trained inbudgeting, you have decided to prepare comprehensive budgets forthe upcoming second quarter in order to show management thebenefits that can be gained from an integrated budgeting program.To this end, you have worked with accounting and other areas togather the information assembled below. |
The company sells many styles ofearrings, but all are sold for the same priceâ$11 per pair. Actualsales of earrings for the last three months and budgeted sales forthe next six months follow (in pairs of earrings): |
| January(actual) | 20,200 | June (budget) | 50,200 |
| February(actual) | 26,200 | July (budget) | 30,200 |
| March (actual) | 40,200 | August (budget) | 28,200 |
| April (budget) | 65,200 | September(budget) | 25,200 |
| May (budget) | 100,200 | ||
The concentration of sales before and during May is due toMotherâs Day. Sufficient inventory should be on hand at the end ofeach month to supply 40% of the earrings sold in the followingmonth. |
Suppliers are paid $4.1 for a pairof earrings. One-half of a monthâs purchases is paid for in themonth of purchase; the other half is paid for in the followingmonth. All sales are on credit, with no discount, and payablewithin 15 days. The company has found, however, that only 20% of amonthâs sales are collected in the month of sale. An additional 70%is collected in the following month, and the remaining 10% iscollected in the second month following sale. Bad debts have beennegligible. |
| Monthlyoperating expenses for the company are given below: |
| Variable: | |||
| Sales commissions | 4% | of sales | |
| Fixed: | |||
| Advertising | $ | 210,000 | |
| Rent | $ | 19,000 | |
| Salaries | $ | 108,000 | |
| Utilities | $ | 7,500 | |
| Insurance | $ | 3,100 | |
| Depreciation | $ | 15,000 | |
| Insurance is paid on an annualbasis, in November of each year. |
The company plans to purchase$16,500 in new equipment during May and $41,000 in new equipmentduring June; both purchases will be for cash. The company declaresdividends of $15,750 each quarter, payable in the first month ofthe following quarter. |
| Alisting of the companyâs ledger accounts as of March 31 is givenbelow: |
| Assets | ||
| Cash | $ | 75,000 |
| Accounts receivable($28,820 February sales; $353,760 Marchsales) | 382,580 | |
| Inventory | 106,928 | |
| Prepaidinsurance | 21,500 | |
| Property andequipment (net) | 960,000 | |
| Total assets | $ | 1,546,008 |
| Liabilities and Stockholdersâ Equity | ||
| Accountspayable | $ | 101,000 |
| Dividendspayable | 15,750 | |
| Common stock | 820,000 | |
| Retainedearnings | 609,258 | |
| Total liabilitiesand stockholdersâ equity | $ | 1,546,008 |
The company maintains a minimumcash balance of $51,000. All borrowing is done at the beginning ofa month; any repayments are made at the end of a month. | ||||||||||
| The company has an agreement witha bank that allows the company to borrow in increments of $1,000 atthe beginning of each month. The interest rate on these loans is 1%per month and for simplicity we will assume that interest is notcompounded. At the end of the quarter, the company would pay thebank all of the accumulated interest on the loan and as much of theloan as possible (in increments of $1,000), while still retainingat least $51,000 in cash. Question
|
You have just been hired as a new management trainee by EarringsUnlimited, a distributor of earrings to various retail outletslocated in shopping malls across the country. In the past, thecompany has done very little in the way of budgeting and at certaintimes of the year has experienced a shortage of cash. |
Since you are well trained inbudgeting, you have decided to prepare comprehensive budgets forthe upcoming second quarter in order to show management thebenefits that can be gained from an integrated budgeting program.To this end, you have worked with accounting and other areas togather the information assembled below. |
The company sells many styles ofearrings, but all are sold for the same priceâ$18 per pair. Actualsales of earrings for the last three months and budgeted sales forthe next six months follow (in pairs of earrings): |
| January(actual) | 22,800 | June (budget) | 52,800 |
| February(actual) | 28,800 | July (budget) | 32,800 |
| March (actual) | 42,800 | August (budget) | 30,800 |
| April (budget) | 67,800 | September(budget) | 27,800 |
| May (budget) | 102,800 | ||
The concentration of sales before and during May is due toMotherâs Day. Sufficient inventory should be on hand at the end ofeach month to supply 40% of the earrings sold in the followingmonth. |
Suppliers are paid $5.4 for a pairof earrings. One-half of a monthâs purchases is paid for in themonth of purchase; the other half is paid for in the followingmonth. All sales are on credit, with no discount, and payablewithin 15 days. The company has found, however, that only 20% of amonthâs sales are collected in the month of sale. An additional 70%is collected in the following month, and the remaining 10% iscollected in the second month following sale. Bad debts have beennegligible. |
| Monthlyoperating expenses for the company are given below: |
| Variable: | |||
| Sales commissions | 4% | of sales | |
| Fixed: | |||
| Advertising | $ | 340,000 | |
| Rent | $ | 32,000 | |
| Salaries | $ | 134,000 | |
| Utilities | $ | 14,000 | |
| Insurance | $ | 4,400 | |
| Depreciation | $ | 28,000 | |
| Insurance is paid on an annualbasis, in November of each year. |
The company plans to purchase$23,000 in new equipment during May and $54,000 in new equipmentduring June; both purchases will be for cash. The company declaresdividends of $25,500 each quarter, payable in the first month ofthe following quarter. |
| Alisting of the companyâs ledger accounts as of March 31 is givenbelow: |
| Assets | ||
| Cash | $ | 88,000 |
| Accounts receivable($51,840 February sales; $616,320 Marchsales) | 668,160 | |
| Inventory | 146,448 | |
| Prepaidinsurance | 28,000 | |
| Property andequipment (net) | 1,090,000 | |
| Total assets | $ | 2,020,608 |
| Liabilities and Stockholdersâ Equity | ||
| Accountspayable | $ | 114,000 |
| Dividendspayable | 25,500 | |
| Common stock | 1,080,000 | |
| Retainedearnings | 801,108 | |
| Total liabilitiesand stockholdersâ equity | $ | 2,020,608 |
The company maintains a minimumcash balance of $64,000. All borrowing is done at the beginning ofa month; any repayments are made at the end of a month. |
The company has an agreement witha bank that allows the company to borrow in increments of $1,000 atthe beginning of each month. The interest rate on these loans is 1%per month and for simplicity we will assume that interest is notcompounded. At the end of the quarter, the company would pay thebank all of the accumulated interest on the loan and as much of theloan as possible (in increments of $1,000), while still retainingat least $64,000 in cash. |
| Required: | |
| 1. | Prepare a master budget for thethree-month period ending June 30. Include the following detailedbudgets: |
| a. | A sales budget, by month and intotal. |
| b. | A schedule of expected cashcollections from sales, by month and in total. |
| c. | A merchandise purchases budgetin units and in dollars. Show the budget by month and in total.(Round unit cost of purchases to 1 decimalplace.) |
| d. | A schedule of expected cash disbursements for merchandisepurchases, by month and in total. |
| 2. | A cash budget. Show the budget by month and in total.(Cash deficiency, repayments and interest should beindicated by a minus sign.) |
| 3. | A budgeted income statement for the three-month period endingJune 30. Use the contribution approach. |
| 4. | A budgeted balance sheet as ofJune 30. |
