CASE 8-33 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-$10 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)

February (actual)

March (actual)

April (budget)

May (budget)

June (budget)

July (budget)

August (budget)

September (budget)

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 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:

20,000

26,000

40,000

65,000

100,000

50,000

30,000

28,000

25,000

Variable:

Sales commissions 4% of sales

Fixed:

Advertising

Rent

Salaries

Utilities

Insurance

Depreciation

$200,000

$18,000

$106,000

$7,000

$3,000

$14,000

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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.

The company's balance sheet as of March 31 is given below:/nAssets

Cash

Accounts receivable ($26,000 February sales;

$320,000 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 stockholder's equity

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

$ 74,000

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.

346,000

104,000

21,000

950,000

$1,495,000

The company maintains a minimum cash balance of $50,000. 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 $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 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 $1,000), while still retaining

at least $50,000 in cash.

$ 100,000

15,000

800,000

580,000

$1,495,000

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.

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.