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Instructions:January (Actual) 20,000 April (Budgeted) 65,000 July (Budgeted) 30, February (Actual) 26,000 May (Budgeted) 100,000 August (Budgeted) 28, March (Actual) 40,000 June (Budgeted) 50,000 September (Budgeted) 25,Variable: Sales Commisions 4% of Sales Fixed: Advertising $200, Rent $18, Salari...

Description

Earrings Unlimited Instructions: 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 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 February March

(Actual) (Actual) (Actual)

20,000 26,000 40,000

April May June

(Budgeted) (Budgeted) (Budgeted)

65,000 100,000 50,000

July August September

(Budgeted) (Budgeted) (Budgeted)

30,000 28,000 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 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 no discount, and payable within 15 days. 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: Sales Commisions

4% of Sales

Fixed: Advertising Rent Salaries Utilities Insurance Depreciation

$200,000 $18,000 $106,000 $7,000 $3,000 $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. A listing of the company’s ledger accounts as of March 31 is given below:

Assets Cash Accounts Receivable Inventory Prepaid Insurance Property and Equipment (net) Total Assets

$74,000 $346,000 $104,000 $21,000 $950,000 $1,495,000

Liabilities & Stockholders Equity Accounts Payable Dividends Payable Capital Stock Retained Earnings Total Liaibilities & Stockholders Equity

$100,000 $15,000 $800,000 $580,000 $1,495,000

The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month. (Exception: The company may dip below the $50,000 level in the final month if necessary, but only for the amount due in interest expenses.) The annual interest rate is 12%. Interest is computed and paid at the end of each quarter on all loans outstanding during the quarter. Requirements: Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: A sales budget, by month and in total. A schedule of expected cash collections from sales, by month and in total. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. A schedule of expected cash disbursements for merchandise purchases, by month and in total. 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. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. A budgeted balance sheet as of June 30. Handing in the Project: This project must be submitted electronically by April 14th, at 11:59 PM. Please drop your two assignments (the excel document and the power point) in the original folder where you found this assignment. You must save your files with the following title to receive any credit. yournetd - "Company Name". Example - "zlh2 - Lebo.xls" & "zlh2 - Lebo.ppt" . If you are using office 2007, please convert all documents to xls and ppt format. DO NOT leave anything in xlsx, or pptx or they will not be graded. Excel Requirements: Due to the nature of this project, most points will be awarded for the ability to produce a neat, and well linked spreadsheet with the correct LINKED formulas. If you do not understand how to link sheets, please see a TA or attend an excel review session to attain maximum points. Begin by producing an input page with all the information from the instructions. Name each cell that you will be using on the input page with descript titles to make it identification of cells easier for TA's. Example - Click cell D13 on the instructions sheet. In the upper-lefthand box in excel (the "Name Box") you will see that it has been labeled "January_Sales" Now any time you type "=January_Sales", that value will appear. After creating the input page, you will link the budget sheets you have been given, to the input page to produce your budget. All worksheets beyond the input sheet may not contain any hard-coded numbers. You may link cells on each budget to eachother and between the budgets but you may not input a number manually. The only exception to this rule will occur in the financing section of budget 3. It is possible to create an If Statement to solving for financing terms, however you can manually input numbers here if necessary. Make sure that you use a formula to determine the interest amount. PowerPoint Requirements: Perform analysis to determine the state of the company. Based on the budgets you created, what are the current trends in sales, net income, cash (including financing), and inventory. Each analysis should include your thoughts as well as a chart or graph to visually support your points. Powerpoint Presentations should be limited to less than 10 slides and should resemble something close to the following layout. Introduction Sales Net Income Cash Inventory Overall Health of the company Conclusions Please limit text on the slides to just bullet points. In-depth conclusions can be formulated in the notes section in powerpoint Extra Credit: You may choose to present your powerpoint presentation in optional sections during the final week of classes to earn up to 1 full point added to your final grade. Please notify your TA upon completion of the project and leave a note with your project if you choose to do this.

Actual and Budgeted Sales (in pairs of earrings) January February March April May June July August September Sales Information Price per unit Sales collected in current month Sales collected in following month Sales collected 2 months after sale % of next month's inventory on hand at end of this month Cost of purchases Purchases paid for in same month Purchases paid for in following month Interest rate on loans Monthly Operating Expenses Variable: Sales Commissions (% of sales) Fixed: Advertising Rent Salaries Utilities Insurance Depreciation

Actual Actual Actual Budgeted Budgeted Budgeted Budgeted Budgeted Budgeted

20000 26000 40000 65000 100000 50000 30000 28000 25000

$10 20% 70% 10% 40% $4 50% 50% 12%

4% $200,000 $18,000 $106,000 $7,000 $3,000 $14,000

Current Balance Sheet (March 31) Assets: Cash Accounts Receivable Inventory Prepaid Insurance Property and Equipment (net) Total Assets

$74,000 $346,000 $104,000 $21,000 $950,000 $1,495,000

Liabilities and Stockholders Equity: Accounts Payable Dividends Payable Capital Stock Retained Earnings Total Liaibilities & Stockholders Equity

$100,000 $15,000 $800,000 $580,000 $1,495,000

Purchases New Equipment (May) New Equipment (June)

$16,000 $40,000

Other Minimum Cash Balance

$50,000

Earrings Unlimited April a. Sales budget: Budgeted unit sales Selling price per unit Total sales b. Schedule of expected cash collections: February sales March sales April sales May sales June sales Total cash collections

65,000 $10 $650,000

$26,000 $280,000 $130,000

May 100,000 $10 $1,000,000

$40,000 $455,000 $200,000

June

Quarter

50,000 $10 $500,000

215,000 $10 $2,150,000

$26,000 $320,000 $650,000 $900,000 $100,000 $1,996,000

$436,000

$695,000

$65,000 $700,000 $100,000 $865,000

65,000 40,000 105,000 26,000 79,000 $316,000

100,000 20,000 120,000 40,000 80,000 $320,000

50,000 12,000 62,000 20,000 42,000 $168,000

215,000 12,000 227,000 104,000 123,000 $492,000

d. Expected cash payments for merchandise purchases: Accounts payable $100,000 April purchases $158,000 May purchases June purchases Total cash payments $258,000

$158,000 $160,000

$160,000 $84,000 $244,000

$100,000 $316,000 $320,000 $84,000 $820,000

c. Budgeted merchandise purchases: Budgeted unit sales Add desired ending inventory Total needs Less beginning inventory Required purchases Cost of purchases

$318,000

cost of purchases * 50%

Earrings Unlimited Cash Budget For the Three Months Ending June 30 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

April $74,000 $436,000 $510,000

May $50,000 $695,000 $745,000

June $50,000 $865,000 $915,000

Quarter $74,000 $1,996,000 $2,070,000

$258,000 $200,000 $18,000 $106,000 $26,000 $7,000

$318,000 $200,000 $18,000 $106,000 $40,000 $7,000 $16,000

$244,000 $200,000 $18,000 $106,000 $20,000 $7,000 $40,000

$705,000 $40,000

$635,000 $280,000

$820,000 $600,000 $54,000 $318,000 $86,000 $21,000 $56,000 $15,000 $1,970,000 $100,000

180,000 5,300 185,300 $94,700

$180,000 $(180,000) $5,300 $5,300 $94,700

$15,000 $630,000 $(120,000) 170,000

170,000 $50,000

10,000

10,000 $50,000

Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 Sales revenue Less variable expenses: Cost of goods sold Commissions Contribution margin Less fixed expenses: Advertising Rent Salaries Utilities Insurance Depreciation Net operating income Less interest expense Net income

$2,150,000 $860,000 $86,000 $1,204,000 $600,000 $54,000 $318,000 $21,000 $9,000 $42,000 $160,000 $5,300 $154,700

Earrings Unlimited Budgeted Balance Sheet June 30 Assets Cash Accounts receivable (First Establish Below) Inventory Prepaid insurance Property and equipment, net Total assets Liabilities and Stockholders’ Equity Accounts payable, purchases Notes Payable Dividends payable Insurance Payable Capital stock Retained earnings (First Establish Below) Total liabilities and stockholders’ equity

$94,700 $800,000 $12,000 $12,000 $964,000 $1,882,700

$84,000 $15,000 $24,000 $800,000 $719,700 $1,642,700

Accounts receivable at June 30: 70% × May sales 20% × June sales Total

$700,000 $100,000 $800,000

Retained earnings at June 30: Balance, March 31 Add net income Total Less dividends declared Balance, June 30

$580,000 $154,700 $734,700 $(15,000) $719,700

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