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Exercise 9-12 Working with More Than One Cost Driver (LO9-1, LO9-2, LO9-3] The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers it uses in its budgeting and performance reportsthe number of courses and the total number of students. For example, the school might run two courses in a month and have a total of 62 students enrolled in those two courses. Data concerning the company's cost formulas appear below: Cost per Fixed Cost per Cost per Month Course $ 2,950 Student $ 280 $ 50 Instructor wages Classroom supplies Utilities Campus rent Insurance Administrative expenses $1,210 $5,000 $2,000 $4,000 $ 44 $ 5 For example, administrative expenses should be $4,000 per month plus $44 per course plus $5 per student. The company's sales should average $870 per student. The company planned to run four courses with a total of 62 students; however, it actually ran four courses with a total of only 56 students. The actual operating results for September appear below: Revenue Instructor wages Classroom supplies Utilities Campus rent Insurance Administrative expenses Actual $ 51,040 $ 11,080 $ 17,210 $ 1,820 $ 5,000 $ 2,140 $ 3,912 Building Your Skills Case (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-$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) February (actual) March (actual) April (budget) May (budget) 22,800 28,800 42,800 67,800 102,800 June (budget) July (budget) August (budget) September (budget) 52,800 32,800 30,800 27,800 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 $5.40 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: Monthly operating expenses for the company are given below: 4% of sales Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation $ 340,000 $ 32,000 $ 134,000 $ 14,000 $ 4,400 $ 28,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $23,000 in new equipment during May and $54,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $25,500 each quarter, payable in the first month of the following quarter. The company's balance sheet as of March 31 is given below: $ 88,000 Assets Cash Accounts receivable ($51,840 February sales; $616, 320 March sales) Inventory Prepaid insurance Property and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable Common stock Retained earnings Total liabilities and stockholders' equity 668,160 146,448 28,000 1,090,000 $ 2,020,608 $ 114,000 25,500 1,080,000 801,108 $ 2,020,608 The company maintains a minimum cash balance of $64,000. 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 $64,000 in cash. 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 $64,000 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 $64,000. 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. Req 1A Reg 1B Req 1C Req 1D Req 2 Reg 3 Req 4 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 $64,000. (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 $ 88,000 $ 64,024 $ 303,988 $ 88,000 835,200 1,301,400 1,607,400 3,744,000 923,200 1,365,424 1,911,388 3,832,000 Beginning cash balance Add collections from customers Total cash available Less cash disbursements: Merchandise purchases Advertising Rent 444,420 334,860 340,000 32,000 134,000 48,816 Salaries 340,000 32,000 134,000 74,016 14,000 23,000 Commissions Utilities 344,520 1,123,800 340,000 1,020,000 32,000 96,000 134,000 402,000 38,016 160,848 14,000 42.000 54,000 77,000 25,500 956,536 2,947,148 954,852 884,852 14,000 Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements 25,500 929, 176 (5,976) 1,061,436 303,988 Merchandise purchases Advertising 344,520 340,000 334,860 340,000 32,000 134,000 Rent 32,000 Salaries 444,420 340,000 32,000 134,000 74,016 14,000 23,000 Commissions 48,816 14,000 134,000 38,016 14,000 54,000 1,123,800 1,020,000 96,000 402,000 160,848 42,000 77,000 25,500 2,947,148 884,852 Utilities Equipment purchases Dividends paid Total cash disbursements 25,500 929,176 (5,976) 1,061,436 303,988 956,536 954,852 70,000 Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing Ending cash balance 70,000 70,000 X 70,000 1,400 1,400 71,400 141,400 $ 883,452 $ 743,452 0 70,000 $ 64,024 $ 303,988 Req 1D Req3 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 Sales $4,021,200 Variable expenses: Commissions $ 160,848 Interest expense x 1,400 X Insurance x 13,200 X 175,448 3,845,752 Contribution margin Fixed expenses: Advertising Rent 1,020,000 96,000 Salaries Depreciation 402,000 84,000 42,000 Utilities Utilities x 1,644,000 2,201,752 Net operating income Interest expense X 1,400 X 13,200 X Insurance 175,448 3,845,752 Contribution margin Fixed expenses: Advertising Rent Salaries 1,020,000 96,000 402,000 84,000 42,000 Depreciation Utilities Utilities 1,644,000 2,201,752 Net operating income Net income $2,201,752 Req 1A Req 1B Req 1C Req 1D Req 2 Reg 3 Reg 4 Prepare a master budget for the three-month period ending June 30 that includes a budgeted balance sheet as of June 30. Earrings Unlimited Budgeted Balance Sheet June 30 Assets Cash $ 883,452 X 945,360 70,848 Accounts receivable Inventory Property and equipment, net Prepaid insurance 1,083,000 14,800 $ Total assets 2,997,460 Liabilities and Stockholders' Equity Accounts payable $ 120,960 Dividends payable 25,500 Common stock 1,080,000 Retained earnings 1,771,000 X Total liabilities and stockholders' equity 2,997,460