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COURSE PROJECT 1 INSTRUCTIONS
You have just been contracted as a new management trainee by
Earrings Unlimited, a distributor of earrings to various retail outlets 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 – $10per pair. Actual sales of earrings for the last three
months and budgeted sales for the next six months follow:

January (actual)

20,000

February (actual)

26,000

March (actual)

40,000

April (budget)

65,000

May (budget)

100,000

June (budget)

50,000

July (budget)

30,000

August (budget)

28,000

September (budget)

25,000

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 $4 for each earring. 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 no discounts. The
company has found, however, that 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 expenses:
Sales commissions 4% of sales
Fixed expenses:
Advertising
$200,000
Rent $18,000
Salaries $106,000
Utilities $
7,000
Insurance $3,000
Depreciation $14,000
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.

Other relevant data is given below:
Cash balance as of March 31st $74,000
Inventory balance as of March 31st $112,000
Merchandise purchases for March $200,000

The company maintains a minimum cash balance of at least $50,000
at the end of each month. 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 the exact amount needed 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 will pay the
bank all of the accrued interest on the loan and as much of the loan as
possible while still retaining at least $50,000 in cash.
Required:
Prepare a cash 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. Determine
any borrowing that would be needed to maintain the minimum cash balance of $50,000.

PROJECT 1 – Excel Template

Student
Name:

SALES
BUDGET:

April
May
June
Quarter

Budgeted
unit sales

Selling
price per unit

Total sales

SCHEDULE
OF EXPECTED CASH COLLECTIONS:

April
May
June
Quarter

February
Sales

March Sales

April Sales

May Sales

June Sales

Total
cash collections

MERCHANDISE
PURCHASES BUDGET:

April
May
June
Quarter

Budgeted
unit sales

Add desired
ending inventory

Total needs

Less
beginning inventory

Required
purchases

Cost of
purchases @ $4 per unit

BUDGETED
CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES:

April
May
June
Quarter

March
Purchases

April
Purchases

May
Purchases

June
Purchases

Total cash
payments

EARRINGS UNLIMITED

CASH BUDGET

FOR THE 3 MONTHS ENDING JUNE 30

April
May
June
Quarter

Cash balance

Add
collections from customers

Total cash
available

Less
disbursements

Merchandise purchases

Advertising

Rent

Salaries

Commissions

Utilities

Equipment purchases

Dividends paid

Total
disbursements

Excess
(deficiency) of receipts

over disbursements

Financing:

Borrowings

Repayments

Interest

Total
financing

Cash
balance, ending