The company sells many styles of earrings, but all are sold for the same priceâ$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
February (actual)
24,000
March (actual)
40,000
April (budget)
100,000
May (budget)
140,000
June (budget)
80,000
July (budget)
60,000
August (budget)
26,000
September (budget)
32,000
The concentration of sales before and during May is due to Motherâs Day. Sufficient inventory should be on hand at the end of each month to supply 45% of the earrings sold in the following month.
Suppliers are paid $4 for a pair of earrings. One-half of a monthâs 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 22% of a monthâs sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 8% 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
$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.
The companyâs balance sheet at March 31 is given below:
Assets
Cash
$74,000
Accounts receivable (net)
331,200
Inventory
180,000
Prepaid insurance
21,000
Property and equipment (net)
950,000
Total assets
$1,556,200
Liabilities and Stockholdersâ Equity
Accounts payable
$134,000
Dividends payable
15,000
Common stock
800,000
Retained earnings
607,200
Total liabilities and stockholdersâ equity
$1,556,200
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. A sales budget, by month and in total. (3 points)
b. A schedule of expected cash collections from sales, by month and in total. (3 points)
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (3 points)
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. (3 points)
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. (8 points)
The company sells many styles of earrings, but all are sold for the same priceâ$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 |
| February (actual) | 24,000 |
| March (actual) | 40,000 |
| April (budget) | 100,000 |
| May (budget) | 140,000 |
| June (budget) | 80,000 |
| July (budget) | 60,000 |
| August (budget) | 26,000 |
| September (budget) | 32,000 |
The concentration of sales before and during May is due to Motherâs Day. Sufficient inventory should be on hand at the end of each month to supply 45% of the earrings sold in the following month.
Suppliers are paid $4 for a pair of earrings. One-half of a monthâs 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 22% of a monthâs sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 8% 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 | $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.
The companyâs balance sheet at March 31 is given below:
| Assets | |
| Cash | $74,000 |
| Accounts receivable (net) | 331,200 |
| Inventory | 180,000 |
| Prepaid insurance | 21,000 |
| Property and equipment (net) | 950,000 |
| Total assets | $1,556,200 |
| Liabilities and Stockholdersâ Equity | |
| Accounts payable | $134,000 |
| Dividends payable | 15,000 |
| Common stock | 800,000 |
| Retained earnings | 607,200 |
| Total liabilities and stockholdersâ equity | $1,556,200 |
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. A sales budget, by month and in total. (3 points)
b. A schedule of expected cash collections from sales, by month and in total. (3 points)
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (3 points)
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. (3 points)
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. (8 points)
Related questions
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 priceâ$13 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) | 21,400 | June (budget) | 51,400 |
| February (actual) | 27,400 | July (budget) | 31,400 |
| March (actual) | 41,400 | August (budget) | 29,400 |
| April (budget) | 66,400 | September (budget) | 26,400 |
| May (budget) | 101,400 | ||
The concentration of sales before and during May is due to Motherâs 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 $4.7 for a pair of earrings. One-half of a monthâs 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 monthâs 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 | $ | 270,000 | |
| Rent | $ | 25,000 | |
| Salaries | $ | 120,000 | |
| Utilities | $ | 10,500 | |
| Insurance | $ | 3,700 | |
| Depreciation | $ | 21,000 | |
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $19,500 in new equipment during May and $47,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $20,250 each quarter, payable in the first month of the following quarter.
A listing of the companyâs ledger accounts as of March 31 is given below:
| Assets | ||
| Cash | $ | 81,000 |
| Accounts receivable ($35,620 February sales;$430,560 March sales) | 466,180 | |
| Inventory | 124,832 | |
| Prepaid insurance | 24,500 | |
| Property and equipment (net) | 1,020,000 | |
| Total assets | $ | 1,716,512 |
| Liabilities and Stockholdersâ Equity | ||
| Accounts payable | $ | 107,000 |
| Dividends payable | 20,250 | |
| Common stock | 940,000 | |
| Retained earnings | 649,262 | |
| Total liabilities and stockholdersâ equity | $ | 1,716,512 |
The company maintains a minimum cash balance of $57,000. 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 $57,000 in cash.
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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 priceâ$18 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) | 23,800 | June (budget) | 53,800 |
| February (actual) | 29,800 | July (budget) | 33,800 |
| March (actual) | 43,800 | August (budget) | 31,800 |
| April (budget) | 68,800 | September (budget) | 28,800 |
| May (budget) | 103,800 | ||
The concentration of sales before and during May is due to Motherâs 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 $5.90 for a pair of earrings. One-half of a monthâs purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a monthâs 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 | $ | 390,000 | |
| Rent | $ | 37,000 | |
| Salaries | $ | 144,000 | |
| Utilities | $ | 16,500 | |
| Insurance | $ | 4,900 | |
| Depreciation | $ | 33,000 | |
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $25,500 in new equipment during May and $59,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $29,250 each quarter, payable in the first month of the following quarter.
The companyâs balance sheet as of March 31 is given below:
| Assets | ||
| Cash | $ | 93,000 |
| Accounts receivable ($53,640 February sales; $630,720 March sales) | 684,360 | |
| Inventory | 162,368 | |
| Prepaid insurance | 30,500 | |
| Property and equipment (net) | 1,140,000 | |
| Total assets | $ | 2,110,228 |
| Liabilities and Stockholdersâ Equity | ||
| Accounts payable | $ | 119,000 |
| Dividends payable | 29,250 | |
| Common stock | 1,180,000 | |
| Retained earnings | 781,978 | |
| Total liabilities and stockholdersâ equity | $ | 2,110,228 |
The company maintains a minimum cash balance of $69,000. 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 $69,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
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 $69,000.
A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
A budgeted balance sheet as of June 30.
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 priceâ$15 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) | 21,800 | June (budget) | 51,800 |
| February (actual) | 27,800 | July (budget) | 31,800 |
| March (actual) | 41,800 | August (budget) | 29,800 |
| April (budget) | 66,800 | September (budget) | 26,800 |
| May (budget) | 101,800 | ||
The concentration of sales before and during May is due to Motherâs 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 $4.90 for a pair of earrings. One-half of a monthâs purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a monthâs 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 | $ | 290,000 | |
| Rent | $ | 27,000 | |
| Salaries | $ | 124,000 | |
| Utilities | $ | 11,500 | |
| Insurance | $ | 3,900 | |
| Depreciation | $ | 23,000 | |
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $20,500 in new equipment during May and $49,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,750 each quarter, payable in the first month of the following quarter.
Selected items from the companyâs March 31 balance sheet are as follows:
| Cash | $ | 83,000 |
| Accounts receivable ($41,700 February sales; $501,600 March sales) | 543,300 | |
| Inventory | 130,928 | |
| Accounts payable | 109,000 | |
| Dividends payable | 21,750 | |
The company maintains a minimum cash balance of $59,000. 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 $59,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
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 $59,000.
