Master Budget: You Have Just Been Hired As A New Management ✓ Solved
Master Budget: You have just been hired as a new managemen
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.
The company sells many styles of earrings, all for the same price—$13 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months, in pairs of earrings, are as follows: January (actual) 20,600, February (actual) 26,600, March (actual) 40,600, April (budget) 65,600, May (budget) 100,600, June (budget) 50,600, July (budget) 30,600, August (budget) 28,600, and September (budget) 25,600. 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 $4.30 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, with 20% collected in the month of sale, 70% in the following month, and 10% in the second month following the sale. Monthly operating expenses include variable sales commissions at 4% of sales and fixed expenses such as advertising ($230,000), rent ($21,000), salaries ($112,000), utilities ($8,500), and insurance ($3,300). Depreciation amounts to $17,000 and insurance is paid annually in November.
The company plans two equipment purchases: $17,500 in May and $43,000 in June, both for cash. It declares dividends of $17,250 each quarter, payable in the first month of the following quarter. As of March 31, the balance sheet shows total assets of $1,649,152 and total liabilities and stockholders' equity also at $1,649,152, including accounts payable of $103,000 and dividends payable of $17,250.
The company maintains a minimum cash balance of $53,000. Borrowing occurs at the start of a month, with repayments made at month-end, borrowing in $1,000 increments at a 1% interest rate.
Paper For Above Instructions
Master Budget for Earrings Unlimited: Preparation for Q2
1. Sales Budget
The sales budget is a crucial component of the master budget. As Earrings Unlimited plans its earnings, the sales budget breaks down expected sales for the second quarter as follows:
| Month | Pairs Sold | Sales Revenue ($) |
|---|---|---|
| April | 65,600 | $854,800 |
| May | 100,600 | $1,307,800 |
| June | 50,600 | $657,800 |
| Total | 216,800 | $2,820,400 |
2. Schedule of Expected Cash Collections
The cash collections schedule outlines how and when sales revenues will be collected from customers.
| Month | Current Month | Previous Month | Two Months Prior | Total Collections ($) |
|---|---|---|---|---|
| April | $170,960 | $5,320 | $56,800 | $232,080 |
| May | $261,560 | $170,960 | $5,320 | $437,840 |
| June | $131,120 | $261,560 | $170,960 | $563,640 |
| Total | $563,640 | $438,840 | $232,080 | $1,234,560 |
3. Merchandise Purchases Budget
The merchandise purchases budget calculates the units and costs required to meet sales demands and maintain the desired inventory levels. The inventory target is to have enough stock at the end of each month to match 40% of the next month’s sales.
| Month | Required Ending Inventory (Units) | Sales to Meet (Units) | Total Required (Units) | Purchases (Units) | Total Cost ($) |
|---|---|---|---|---|---|
| April | 12,240 | 65,600 | 77,840 | 54,240 | $233,424 |
| May | 40,320 | 100,600 | 140,920 | 86,680 | $372,824 |
| June | 11,440 | 50,600 | 62,040 | 56,640 | $243,584 |
| Total | 64,000 | 216,800 | 280,800 | 197,760 | $849,832 |
4. Schedule of Expected Cash Disbursements for Merchandise Purchases
The following table outlines the cash disbursements for merchandise purchases as scheduled:
| Month | Current Month Purchases ($) | Previous Month Purchases ($) | Total Disbursements ($) |
|---|---|---|---|
| April | $233,424 | - | $233,424 |
| May | $372,824 | $116,712 | $489,536 |
| June | $243,584 | $186,412 | $430,116 |
5. Cash Budget
Cash budgeting summarizes the cash inflows and outflows, ensuring that the company maintains its minimum cash balance:
| Month | Beginning Cash ($) | Total Cash Inflows ($) | Total Cash Outflows ($) | Ending Cash ($) | Borrowing ($) |
|---|---|---|---|---|---|
| April | $77,000 | $232,080 | $233,424 | $75,656 | - |
| May | $75,656 | $437,840 | $489,536 | $23,960 | $30,000 |
| June | $53,960 | $563,640 | $430,116 | $187,484 | - |
6. Budgeted Income Statement
The budgeted income statement, prepared using the contribution format, summarizes revenues and expenses for the quarter:
| Description | Amount ($) |
|---|---|
| Total Revenue | 2,820,400 |
| Variable Expenses | (113,048) |
| Contribution Margin | 2,707,352 |
| Fixed Expenses | (392,500) |
| Net Income | 2,314,852 |
7. Budgeted Balance Sheet
The budgeted balance sheet as of June 30 showcases the expected financial condition post-budgeting:
Assets
Total Assets: $1,850,000
Liabilities
Total Liabilities: $103,000
Stockholders’ Equity
Total Stockholders’ Equity: $1,747,000
References
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