Question
Hawaiian Leis Limited, a distributor of low-cost Hawaiian leis, has an exclusive franchise on the distribution of the leis, and sales have grown so rapidly
Hawaiian Leis Limited, a distributor of low-cost Hawaiian leis, has an exclusive
franchise on the distribution of the leis, and sales have grown so rapidly over the past
few years that it has become necessary to add new members to the management team.
To date, the company's budgeting practices have been inferior, and at times the
company has experienced a cash shortage. You have been given responsibility for all
planning and budgeting. Your first assignment is to get master budget ready for the next
three months, starting April 1. You are eager to make a favorable impression on the
president and have assembled the information below.
The leis are sold to retailers for $10 each. Recent and forecast sales in units are as
follows:
January (actual) 20,000 June 50,000
February (actual) 26,000 July 30,000
March (actual) 40,000 August 28,000
April 65,000 September 25,000
May 100,000
The large buildup in sales before and during May is due to Mother's Day. Ending
inventories should be equal to 40% of the next month's sales in units.
The leis cost the company $4 each. Purchases are paid for as follows: 50% in the month
of purchase and the remaining 50% 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 month's sales are collected by month-end. 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.
The company's monthly selling and administrative expenses are given below:
Variable:
Sales commissions 4% of sales
Fixed:
Advertising $200,000
Rent 18,000
Wages and salaries 106,000
Utilities 7,000
Insurance 3,000
Depreciation 14,000
All selling and administrative expenses are paid during the month, in cash, with the
exception of depreciation and insurance. 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 paid in
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 ($26,000 February sales;
$320,000 March sales) 346,000
Inventory 104,000
Prepaid insurance 21,000
Fixed assets, net of depreciation 950,000
Total assets $1,495,000
Liabilities and Shareholders' Equity
Accounts payable $ 100,000
Dividends payable 15,000
Common shares 800,000
Retained earnings 580,000
Total liabilities and shareholders' equity $1,495,000
The company wants a minimum ending cash balance each month of $50,000. All
borrowing is done at the beginning of the month, with any repayments made at the end
of the month. The interest rate on these loans is 1% per month and must be paid at the
end of each month based on the outstanding loan balance for that month.
Required:
PART A
Prepare master budget for the three-month period ending June 30. Include the
following detailed budgets:
1.
a. A sales budget by month and in total.
b. A schedule of expected cash collections from sales, 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.
3. A budgeted income statement for the three-month period ending June 30. Use
the variable costing approach.
4. A budgeted balance sheet as of June 30.
PART B
It is now July 31st. The President provides you with the income statement prepared
by the accounting department with the actual results below for the quarter ending
June 30th.
1. Prepare Comprehensive Performance Report. (Hint: You will need to prepare
flexible budget to do this
2. Was the increase in net income mostly attributed to activity or cost control?
Explain.
Hawaiian Leis Limited
Income Statement (218,000 units)
For the Quarter Ending June 30
Sales $ 2,180,000
Variable Expenses:
Cost of Goods Sold $ 872,000
Commissions 87,200 959,200
Contribution Margin 1,220,800
Fixed Expenses:
Advertising 540,000
Rent 54,000
Wages and salaries 330,000
Utilities 21,000
Insurance 9,000
Depreciation 42,000 996,000
Operating Income 224,800
Less: Interest Expense 5,387
Net Income $ 219,413
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