The company sells many styles of earrings, but all are sold for the same price—$
ID: 2573589 • Letter: T
Question
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
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 Mother’s 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 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 22% of a month’s 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 company’s 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 Stockholders’ Equity
Accounts payable
$134,000
Dividends payable
15,000
Common stock
800,000
Retained earnings
607,200
Total liabilities and stockholders’ 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)
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
Explanation / Answer
1 a) Sales Budget Apr May June Qtr. Total Budgeted Unit Sales 100000 140000 80000 320000 Selling price per earing 10 10 10 10 Total Sales 1000000 1400000 800000 3200000 b) Schedule of expected cash collections from sales Apr May June Qtr. Total February Sales 24000*10 240000 8% 19200 19200 March Sales 40000*10 400000 70/8% 280000 32000 312000 Apr Sales computed above 1000000 22/70/8% 220000 700000 80000 1000000 May Sales computed above 1400000 22/70% 308000 980000 1288000 June Sales computed above 800000 22% 176000 176000 Total 519200 1040000 1236000 2795200 The allocation percentage of cash collection of sales have been provided in the question c) Mechandise Purchase Budget Apr May June Qtr. Total Budgeted Unit Sales 100000 140000 80000 320000 Add: Desired ending inventory 45% of following month sale 63000 36000 27000 27000 Total Requirement 163000 176000 107000 347000 Less: Beginning Inventory 45000 63000 36000 45000 Required Purchases 118000 113000 71000 302000 Rate of Purchases 4 4 4 4 Cost of Purchases 472000 452000 284000 1208000 Note that beginning inventory of April i.e; 26160 is determined by April sale 65400*45% since closing inventory d) A schedule of expected cash disbursements for merchandise purchases Apr May June Qtr. Total Accounts Payable (given) Given 134000 134000 Purchases:April 472000/2 236000 236000 472000 May 452000/2 226000 226000 452000 June 284000/2 142000 142000 Total 370000 462000 368000 1200000 2 Cash Budget Apr May June Qtr. Total Cash Balance 74000 50000 50000 174000 Add: Collection from customers 519200 1040000 1236000 2795200 Total Cash Available (A) 593200 1090000 1286000 2969200 Less: Disbursement Merchandise purchases 370000 462000 368000 1200000 Advertising 200000 200000 200000 600000 Rent 18000 18000 18000 54000 Salaries 106000 106000 106000 318000 Commission 5%of Sales 50000 70000 40000 160000 Utilities 7000 7000 7000 21000 Equipment Purchase 0 16000 40000 56000 Dividends Paid 15000 0 0 15000 Total Disbursements (B) 766000 879000 779000 2424000 Minimum desired balance given 50000 50000 50000 150000 Total cash needed - C 816000 929000 829000 2574000 Surplus/deficit -222800 161000 457000 395200 Temporary Borrowings 222800 222800 Temporary investments/Repayments -161000 -457000 -618000 Total effect of financing/borrowing -D 222800 -161000 -457000 -395200 Closing Cash Balance (A+D-B) 50000 50000 50000 150000