The company sells many styles of earrings, but all are sold for the same price—$
ID: 2526930 • Letter: T
Question
The company sells many styles of earrings, but all are sold for the same price—$19 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)
24,000
June (budget)
54,000
February (actual)
30,000
July (budget)
34,000
March (actual)
44,000
August (budget)
32,000
April (budget)
69,000
September (budget)
29,000
May (budget)
104,000
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 $6.00 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. 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
$
400,000
Rent
$
38,000
Salaries
$
146,000
Utilities
$
17,000
Insurance
$
5,000
Depreciation
$
34,000
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $26,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $30,000 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
$
94,000
Accounts receivable ($57,000 February sales; $668,800 March sales)
725,800
Inventory
165,600
Prepaid insurance
31,000
Property and equipment (net)
1,150,000
Total assets
$
2,166,400
Liabilities and Stockholders’ Equity
Accounts payable
$
120,000
Dividends payable
30,000
Common stock
1,200,000
Retained earnings
816,400
Total liabilities and stockholders’ equity
$
2,166,400
The company maintains a minimum cash balance of $70,000. 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 $70,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
1. 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 $70,000.
2. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
3. A budgeted balance sheet as of June 30.
January (actual)
24,000
June (budget)
54,000
February (actual)
30,000
July (budget)
34,000
March (actual)
44,000
August (budget)
32,000
April (budget)
69,000
September (budget)
29,000
May (budget)
104,000
Explanation / Answer
Cash Budget April May June 2nd Quarter Beginning Balance 94000 70960 260420 94000 Cash receipts from customers 904400 1396500 1719500 4020400 Total cash available 998400 1467460 1979920 4114400 Cash payments Disbursement to suppliers in cash 369000 501000 390000 1260000 Dividends 30000 30000 Equipement purchase 26000 60000 86000 Variable Sales commissions 52440 79040 41040 172520 Fixed cash operating Income 601000 601000 601000 1803000 Total cash payments 1052440 1207040 1092040 3351520 Surplus/(Deficiet) -54040 260420 887880 762880 Minimum Cash balance required 70000 70000 70000 70000 Borrowing(Repayment) of Loan 125000 0 -125000 0 Interest paid 3750 3750 Ending Cash balance 70960 260420 759130 759130 Budgeted Income statement for the three months period ending June 30. Revenue from sales 4313000 Less : Cost of goods sold Beginning inventory 165600 Add : purchase of inventory 1278000 Total inventory available 1443600 Less : Ending Inventory 81600 Cost of goods sold 1362000 Gross profit 2951000 Operating expenses Variable selling commissions 172520 Advertising 1200000 Rent 114000 Salaries 438000 Utilities 51000 Insurance 15000 Deprecation 102000 Total operating expenses 2092520 Operating profit 858480 Less ; Interest expense 3750 Net income 854730 Balance sheet as of June 30. Assets Cash 759130 Accounts receivable 1018400 Inventory 81600 Prepaid Insurance 16000 Property & equipment 1134000 Total Assets 3009130 Liabilities & stockholder's equity Accounts payable 138000 Dividends payable 30000 Common stock 1200000 Retained earnings 1641130 Total liabilities & stockholder's equity 3009130 Monthly Sales Budgets April May June 2nd Quarter Sales in units 69000 104000 54000 227000 Sales price 19 19 19 Sales Revenue in 1311000 1976000 1026000 4313000 Monthly Mechandise Purchase Budgets April May June 2nd Quarter Sales in units 69000 104000 54000 227000 Plus Desired ending inventory 41600 21600 13600 21000 Total needed 110600 125600 67600 248000 Less Beginning Inventory 27600 41600 21600 16000 Number of units to produce 83000 84000 46000 213000 Purchase price of each pair of earrings 6 6 6 6 Purchase Value 498000 504000 276000 1278000 Calculation of cash receipts from customers Monthly Sales Budgets April May June 2nd Quarter Sales Revenue in 1311000 1976000 1026000 4313000 Credit sales from Credit sales made in the same month 262200 395200 205200 862600 Credit sales made one month ago 585200 917700 1383200 2886100 Credit sales made two month ago 57000 83600 131100 271700 Total cash collection 904400 1396500 1719500 4020400 Calculation of payment to suppliers April May June 2nd Quarter Total cost of purchases 498000 504000 276000 1278000 Cash Payment for current month's purchases 249000 252000 138000 639000 Cash Payment for prior month's purchases 120000 249000 252000 621000 Total Cash payment 369000 501000 390000 1260000