Homework SourseYou have just been contracted as a new management trainee by
You have just been contracted as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets 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 - $10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow:
January (actual)
20,000
February (actual)
26,000
March (actual)
40,000
April (budget)
65,000
May (budget)
100,000
June (budget)
50,000
July (budget)
30,000
August (budget)
28,000
September (budget)
25,000
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 $4 for each earring. 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 with no discounts. The company has found, however, that 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 expenses:
Sales commissions 4% of sales
Fixed expenses:
Advertising $200,000
Rent $18,000
Salaries $106,000
Utilities $ 7,000
Insurance $3,000
Depreciation $14,000
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 for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.
Other relevant data is given below:
Cash balance as of March 31st $74,000
Inventory balance as of March 31st $112,000
Merchandise purchases for March $200,000
The company maintains a minimum cash balance of at least $50,000 at the end of each month. 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 the exact amount needed 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 will pay the bank all of the accrued interest on the loan and as much of the loan as possible while still retaining at least $50,000 in cash.
Required:
Prepare a cash 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. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.
TEMPLATE:
| January (actual) | 20,000 |
| February (actual) | 26,000 |
| March (actual) | 40,000 |
| April (budget) | 65,000 |
| May (budget) | 100,000 |
| June (budget) | 50,000 |
| July (budget) | 30,000 |
| August (budget) | 28,000 |
| September (budget) | 25,000 |
Solution
Mothers day 1 Sales budget April May June Quarter Sales 650000 1000000 500000 2150000 2 Budgeted Cash receipt April May June Quarter February sales 26000 26000 March sale 280000 84000 364000 April sales 130000 455000 65000 650000 May sales 200000 700000 900000 June sales 100000 100000 Total collection 436000 739000 865000 2040000 3 Production budget April May June Total Sales in units 65,000 1,00,000 50,000 2,15,000 Add ending inventory 40,000 20,000 12,000 12,000 Inventory needed 1,05,000 1,20,000 62,000 2,27,000 Less beginning inventory 26,000 40,000 20,000 26,000 Required Purchase 79,000 80,000 42,000 2,01,000 Cost of purchase @4 per unit 316000 320000 168000 804000 4 Cash Disbursement April May June Total March purchase 100000 100000 April purchase 158000 158000 316000 May purchase 160000 160000 320000 June purchase 84000 84000 Total disbursements 258000 318000 244000 820000 5 Cash budget April May June Quarter Beginning cash balance 74,000 50,000 84,000 74,000 Add Cash collections 436000 739000 865000 2040000 Total collections 5,10,000 7,89,000 9,49,000 21,14,000 Less Cash disbursements Merchandise purchase 258000 318000 244000 820000 Advertising 200000 200000 200000 600000 Rent 18000 18000 18000 54000 Commission 26000 40000 20000 86000 Salaries 106000 106000 106000 318000 Utilities 7000 7000 7000 21000 Equipment purchased 16000 40000 56000 Dividend paid 15000 Total payments 630000 705000 635000 1970000 cash balance -1,20,000 84,000 3,14,000 1,44,000 Financing Loan taken 170000 170000 Loan repaid 170000 170000 Interest paid 5100 5100 Ending cash balance 50,000 84,000 1,38,900 1,38,900
