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
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