CASE 9-30 Earrings Unlimited

QUESTION

CASE 9-30 Earrings Unlimited

You have just been hired as a new
management trainee by Earrings Unlimited, a distributor of earring 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 comprehensive budgets for the upcoming
second quarter in order to show management the benefits that can be gained from
an integrated budgeting program. 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)… 20,000 June
(budget)… 60,000
February (actual)… 26,000 July
(budget)… 30,000
March (actual)… 40,000 August
(budget … 28,000
April (budget)… 75,000
September (budget) 25,000
May (budget)… 90,000

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 for a pair
of earrings. One-half of a month’s purchases are paid for in the month of purchase;
the other half is paid for in the following month. All sales are on credit,
with no discount, and payable within 15 days. The company has found, however,
that only 30% of a month’s sales are collected in the month of sale. An
additional 60% 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…………………$180,000
Rent…………………………..20,000
Salaries……………………110,000
Utilities…………………….7,000
Insurance expired……….5,000
depreciation……………..15,000

Insurance is paid on an annual
basis, in November of each year.
The company plans to purchase
$10,000 in new equipment during May and $25,000 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.

A listing of the company’s ledger
accounts as of March 31 is given below:

Assets
Cash…………………………………………………………………..$
74,000
Accounts Receivable($26,000
February sales; $320,000
March
Sales)…………………………… 346,000
Inventory…………………………………………………………….
104,000
Prepaid
insurance………………………………………………… 21,000
Property and
equipment(net)………………………………… 950,000
Total
Assets………………………………………………………..
$1,495,000

Liabilities and Stockholders’
Equity
Accounts
Payable…………………………………………………$ 100,000
Dividends
Payable………………………………………………… 15,000
Capital
stock……………………………………………………….. 800,000
Retained
Earnings………………………………………………… 580,000
Total liabilities and
stockholders’ equity $1,495,000

Part of the use of the budgeting
program will be to establish an ongoing line of credit at a local bank.
Therefore, determine the borrowing that will be needed to maintain a minimum
cash balance of $50,000. All borrowing will be done at the beginning of a
month; any repayments will be made at the end of the month. The annual interest
rate will be 8%. Interest will be computed and paid at the end of each quarter
on all loans outstanding during the quarter. Compute interest on whole
months(1/12, 2/12, and so forth).

Required
Prepare a master 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.

ANSWER:

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