January (actual) 22,000 June (budget) 52,000 February (actual) 28,000 July (budget) 32,000 March… 1 answer below »

January (actual)

22,000

June (budget)

52,000

February (actual)

28,000

July (budget)

32,000

March (actual)

42,000

August (budget)

30,000

April (budget)

67,000

September (budget)

27,000

May (budget)

102,000

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 $5.00 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:

Variable:

Sales commissions

4

% of sales

Fixed:

Advertising

$

300,000

Rent

$

28,000

Salaries

$

126,000

Utilities

$

12,000

Insurance

$

4,000

Depreciation

$

24,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $21,000 in new equipment during May and $50,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $22,500 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets

Cash

$

84,000

Accounts receivable ($44,800 February sales; $537,600 March sales)

582,400

Inventory

134,000

Prepaid insurance

26,000

Property and equipment (net)

1,050,000

Total assets

$

1,876,400

Liabilities and Stockholders’ Equity

Accounts payable

$

110,000

Dividends payable

22,500

Common stock

1,000,000

Retained earnings

743,900

Total liabilities and stockholders’ equity

$

1,876,400

The company maintains a minimum cash balance of $60,000. 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 $60,000 in cash.

Required:

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

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.

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 $60,000.

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.