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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
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. Because 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$ 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 June budget
February actual July budget
March actual August budget
April budget September budget
May budget
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 of the earrings sold in the following month.
Suppliers are paid $ for a pair of earrings. Onehalf 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 of a months sales are collected in the month of sale. An additional are collected in the following month, and the remaining are collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Variable:
Sales commissions of sales
Fixed:
Advertising $
Rent $
Salaries $
Utilities $
Insurance $
Depreciation $
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $ in new equipment during May and $ in new equipment during June; both purchases will be for cash. The company declares dividends of $ each quarter, payable in the first month of the following quarter.
The companys balance sheet as of March is given below:
Assets
Cash $
Accounts receivable $ February sales; $ 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 $
The company maintains a minimum cash balance of $ 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 $ at the beginning of each month. The interest rate on these loans is per month, and for simplicity, we will assume 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 $ while still retaining at least $ in cash.
Prepare a master budget for the threemonth period ending June that includes a schedule of expected cash collections, by month and in total.
Earrings Unlimited
Schedule of Expected Cash Collections
April May June Quarter
February sales $
March sales
April sales
May sales
June sales
Total cash collections $ $ $ $
Prepare a master budget for the threemonth period ending June that includes a merchandise purchases budget in units and in dollars. Show the budget by month and in total.
Earrings Unlimited
Merchandise Purchases Budget
April May June Quarter
Budgeted unit sales
Total needs
Required purchases
Unit cost
Required dollar purchases $ $ $ $
Prepare a master budget for the threemonth period ending June that includes a schedule of expected cash disbursements for merchandise purchases, by month and in total.
Earrings Unlimited
Budgeted Cash Disbursements for Merchandise Purchases
April May June Quarter
Accounts payable $
April purchases
May purchases
June purchases
Total cash payments $ $ $
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