Acct 241 Principles Of Managerial Accounting Fall 2013 Semes

Acct 241 Principles Of Managerial Accountingfall 2013 Semester Proje

Prepare a comprehensive master budget and budgeted financial statements for Earrings Unlimited for the three-month period ending June 30. This includes a sales budget, cash receipts budget, merchandise purchases budget, cash disbursements budget, cash budget, budgeted income statement using the contribution format, and a budgeted balance sheet. Additionally, perform CVP analysis to determine the break-even point and conduct sensitivity analysis on sales price and purchase price changes.

Use Excel templates to develop detailed budgets, incorporating all relevant data, with formulas for calculations. Show all calculations for CVP analysis, including break-even units and sales dollars. Reconcile changes resulting from sales price and purchase price adjustments, update financial statements accordingly, and ensure adherence to company policies on borrowing, repayment, and minimum cash balances. Collate and foot all schedules for accuracy. Understand the impact of changing sales and purchase prices on cash flow, inventory, interest expense, and other financial metrics.

Paper For Above instruction

Introduction

Effective budgeting is a vital aspect of financial management that enables businesses to plan, coordinate, and control their financial activities. For Earrings Unlimited, a distributor of earrings, preparing a comprehensive master budget for the second quarter of the year facilitates better cash flow management, inventory control, and profitability analysis. This paper discusses the process of developing the master budget, performing CVP analysis, and conducting sensitivity analyses on sales and purchase prices, based on the given scenario and data.

Developing the Master Budget

The first step in budgeting for Earrings Unlimited involves preparing detailed schedules for sales, collections, purchases, disbursements, and cash flows. The sales budget estimates total sales in units and dollars, considering past sales figures and seasonal fluctuations such as Mother's Day, which influences increased sales in May. Since all earrings are sold at $10 per pair, revenue projections rely on the projected unit sales figures, which then inform the cash collections schedule, accounting for the company's collection pattern (20% in the sale month, 70% in the following month, 10% in the second month after sale).

The merchandise purchase budget calculations factor in ending inventory requirements of 40% of the following month's sales, aligning with inventory management policies. Purchases are paid in two installments—50% in the month of purchase and 50% in the following month—requiring careful cash disbursement planning. All calculations rely on formulas to ensure accuracy and adaptability to changing assumptions.

The cash budget encompasses expected cash receipts, disbursements, and financing activities. It considers purchases, operating expenses, equipment acquisitions, dividends, and loan activities to maintain the minimum cash balance of $50,000. The budget includes borrowing strategies such as borrowing in increments of $1,000 at an interest rate of 1% per month, with repayment plans based on cash availability and excess funds.

The income statement, prepared using the contribution margin format, reflects sales revenue, variable costs (Cost of Goods Sold), contribution margin, fixed expenses, and net income. The balance sheet summarizes assets, liabilities, and equity at the end of June, incorporating inventory values, receivables, cash position, and financing arrangements.

CVP Analysis and Break-Even Point

Operating under the assumptions provided, CVP analysis involves calculating the contribution margin per unit and identifying the break-even point in units and sales dollars. The break-even point indicates the minimum sales volume necessary for Earrings Unlimited to cover all fixed and variable costs, thus avoiding losses. The analysis provides critical insights into pricing strategies and sales targets to ensure profitability.

To calculate the break-even point, the contribution margin per unit is derived by subtracting variable costs ($4 purchase cost per pair) from the selling price ($10). This results in a contribution margin of $6 per unit. The fixed costs include expenses that remain constant, such as fixed operating expenses and dividends, which are considered in the analysis. The formula for break-even units is:

Break-even units = Total Fixed Expenses / Contribution Margin per Unit

Similarly, the break-even sales in dollars are calculated by multiplying the break-even units by the unit selling price ($10).

Sensitivity Analysis: Price Changes

The sensitivity analysis evaluates how variations in sales price and purchase price impact profitability and cash flows. When the sales price increases to $12, the contribution margin per unit rises to $8, lowering the break-even point and increasing profitability at existing sales volumes. Conversely, an increase in purchase price to $5 raises variable costs, reducing the contribution margin and raising the break-even point, which could adversely affect net income.

This analysis informs strategic pricing and procurement decisions, emphasizing the importance of maintaining cost efficiency and pricing competitiveness.

Financial Impact of Changes

Adjusting the sales price and purchase price alters not only profit margins but also cash flows, inventory valuation, and interest expenses. The budgeted financial statements demonstrate these effects by recalculating revenues, costs, and profitability under different scenarios. These models help management forecast potential risks and devise contingency plans to ensure financial stability.

Conclusion

Developing a comprehensive master budget for Earrings Unlimited enables proactive financial management, ensuring sufficient cash flow, optimal inventory levels, and profitability. CVP analysis provides critical insights into the company's breakeven point and profitability thresholds. Sensitivity analyses highlight the importance of cost control and strategic pricing, especially when market dynamics or supplier costs change. Accurate budgeting and financial analysis are essential tools for sustainable growth and operational efficiency in a competitive environment.

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