Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]

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$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)	23,000	June (budget)	53,000
February (actual)	29,000	July (budget)	33,000
March (actual)	43,000	August (budget)	31,000
April (budget)	68,000	September (budget)	28,000
May (budget)	103,000

The concentration of sales before and during May is due to Mothers 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 $5.50 for a pair of earrings. One-half of a months 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 months 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	$	350,000
Rent	$	33,000
Salaries	$	136,000
Utilities	$	14,500
Insurance	$	4,500
Depreciation	$	29,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $23,500 in new equipment during May and $55,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $26,250 each quarter, payable in the first month of the following quarter.

The companys balance sheet as of March 31 is given below:

Assets
Cash	$	89,000
Accounts receivable ($55,100 February sales; $653,600 March sales)		708,700
Inventory		149,600
Prepaid insurance		28,500
Property and equipment (net)		1,100,000
Total assets	$	2,075,800
Liabilities and Stockholders Equity
Accounts payable	$	115,000
Dividends payable		26,250
Common stock		1,100,000
Retained earnings		834,550
Total liabilities and stockholders equity	$	2,075,800

The company maintains a minimum cash balance of $65,000. 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 $65,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

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

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

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

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

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 $65,000.

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

4. A budgeted balance sheet as of June 30.

Budgeted unit sales Selling price per unit Sales Budget April May June Quarter 68,000 103,000 53,000 224,000 $ 19 $ 19 $ 19 $ 19 $ $ 1,292,000 $1,957,000 $ 4,256,000 1,007,000 Total sales February sales March sales April sales May sales June sales Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter $ 55,100 $ 55,100 571,900 81,700 653,600 258,400 904,400 129,200 1,292,000 391,400 1,369,900 1,761,300 201,400 201,400 $ 885,400 $ $ 1,377,500 $ 1,700,500 $ 3,963,400 Total cash collections Earrings Unlimited Merchandise Purchases Budget April May June Budgeted unit sales 68,000 103,000 53,000 Add: Desired ending merchandise inventory 41,200 21,200 13,200 Total needs 109,200 124,200 66,200 Less: Beginning merchandise inventory 27,200 41,200 21,200 Required purchases 82,000 83,000 45,000 Unit cost $ 5.50 $ 5.50 $ 5.50 Required dollar purchases $ 451,000 $ 456,500 $ 247,500 Quarter 224,000 13,200 237,200 27,200 210,000 $ 5.50 $ 1,155,000 Prepare a master budget for the three-month period ending June 30 that includes 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 $65,000. (Cash deficiency, repayments and interest should be indicated by a minus sign.) Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Beginning cash balance Add collections from customers 0 0 0 0 Total cash available Less cash disbursements: Merchandise purchases Advertising Rent 0 0 0 Salaries 0 Commissions 0 Utilities 0 0 0 0 0 0 0 0 0 0 0 Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing Ending cash balance 0 0 0 0 0 0 0 $ 0 $ 0 $ 0 $ 0 Prepare a master budget for the three-month period ending June 30 that includes 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 Variable expenses: 0 Fixed expenses: 0 0 0