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 prepare master budget 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 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 complete report).

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