Question 6
Case 8-33 (Algo) 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-$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) 23, 800 June (budget) 53, 800 February (actual) 29,800 July (budget) 33, 800 March (actual) 43, 800 August (budget) 31, 800 April (budget) 68, 800 September (budget) 28, 800 May (budget) 103, 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 $5.90 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: Variable: Sales emissions 4% of sales Fixed: Advertising 5 390, 000 Rent 5 37, 000 Salaries $ 144, 000 Utilities 51 16, 500 Insurance .5 4, 900 Depreciation $ 33, 000 ' lnsurance is paid on an annual basis. in Novemberof each year. The company plans to purchase $25,500 in new equipment during May and $59,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $29,250 each quarter, payable in the first month ofthe following quarter. The company's balance sheet as of March 31 is given below: Assets Cash 5: 93, U 00 Accounts receivable {$53,640 February sales; $630,720 March sales! 634,360 Inventory 162 , 3 68 Prepaid insurance 30, 5 00 Property and equipment [net] 1 , 14!], U CID Total assets 5: 2,110,223 Liabilities and stockholders ' Equity Account-.3 payable 5: 119Ir DUO Dividends payable 29 , 2 50 Common stock 1,130,000 Retained earnings T31 , 9 T3 Total liabilities and stockholders ' equity 5: 2 p 1 10,. 223 The company maintains a minimum cash balance of $69,000. All borrowing is done atthe 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 ofthe 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 $69,000 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 $69,000. 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
