Master Budget You have just been hired as a new management trainee by
master budget problem. only part B in attached file
Part B: Master Budget
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 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—$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)
30,000
June (budget)
45,000
February (actual)
20,000
July (budget)
40,000
March (actual)
50,000
August (budget)
30,000
April (budget)
70,000
September (budget)
20,000
May (budget)
95,000
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 $3 for a pair of earrings. 40% of a month’s purchases is paid for in the month of purchase; the other 60% is paid for in the following month. All sales are on credit. 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.
Monthly operating expenses for the company are given below:
Variable:
Sales commissions
5% of sales
Fixed:
Advertising
$
190,000
Rent
$
20,000
Salaries
$
100,000
Utilities
$
8,000
Insurance
$
3,000
Depreciation
$
14,000
Insurance is paid on an annual basis, in November of each year.
At the end of June, the company received $4,000 deposit for July sales. Sales in advance is a liability.
The company plans to purchase $20,000 in new equipment during May and $60,000 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.
The company’s balance sheet as of March 31 is given below:
Assets
Cash
$
74,000
Accounts receivable ($20,000 February sales; $350,000 March sales)
370,000
Inventory
80,000
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
Common stock
800,000
Retained earnings
580,000
Total liabilities and stockholders’ equity
$
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.
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 $50,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules: Use the formats/tables below. Any other format is unacceptable. Below each table, show how you arrived at the numbers in your tables. Lack of detailed calculations will reduce your marks even if the answers are correct.
ACC 601 Managerial Accounting
Group Case 3 (160 points)
Instructions:
1. As a group, complete the following activities in good form. Read the instructions for each question carefully. Provide all supporting calculations to show how you arrived at your numbers and to demonstrate your understanding of the concepts in each question.
2. Add only the names of group members who participated in the completion of this assignment.
3. Submit only one copy of your completed work via Moodle. Do not send it to me by email.
4. Due: No later than the last day of Module 7. Please note that your professor has the right to change the due date of this assignment.
Part A: Capital Budgeting Decisions
Chee Company has gathered the following data on a proposed investment project:
|
Investment required in equipment |
$320,000 |
|
|
Annual cash inflows |
||
|
Year 1: $50,000 Year 2: 50,000 Year 3: 60,000 Year 4: 40,000 Year 5: 65,000 Year 6: 50,000 Year 7: 70,000 Year 8: 65,000 Salvage value |
$60,000 |
|
|
Life of the investment |
8 years |
|
|
Required rate of return |
10% |
|
|
Assets will be depreciated using straight line depreciation method |
Required:
1. Show all calculations in good form. Answers without supporting calculations will earn zero marks.
2. Calculate the annual incremental net income for all the eight (8) years.
3. Using the net present value and the internal rate of return methods, is this a good investment?
Part B: Master Budget
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 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—$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) |
30,000 |
June (budget) |
45,000 |
|
February (actual) |
20,000 |
July (budget) |
40,000 |
|
March (actual) |
50,000 |
August (budget) |
30,000 |
|
April (budget) |
70,000 |
September (budget) |
20,000 |
|
May (budget) |
95,000 |
|
|
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 $3 for a pair of earrings. 40% of a month’s purchases is paid for in the month of purchase; the other 60% is paid for in the following month. All sales are on credit. 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.
Monthly operating expenses for the company are given below:
|
|
|||
|
Variable: |
|
|
|
|
Sales commissions |
|
5% of sales |
|
|
Fixed: |
|
|
|
|
Advertising |
$ |
190,000 |
|
|
Rent |
$ |
20,000 |
|
|
Salaries |
$ |
100,000 |
|
|
Utilities |
$ |
8,000 |
|
|
Insurance |
$ |
3,000 |
|
|
Depreciation |
$ |
14,000 |
|
Insurance is paid on an annual basis, in November of each year.
At the end of June, the company received $4,000 deposit for July sales. Sales in advance is a liability.
The company plans to purchase $20,000 in new equipment during May and $60,000 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.
The company’s balance sheet as of March 31 is given below:
|
|
|
|
|
Assets |
||
|
Cash |
$ |
74,000 |
|
Accounts receivable ($20,000 February sales; $350,000 March sales) |
|
370,000 |
|
Inventory |
|
80,000 |
|
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 |
|
Common stock |
|
800,000 |
|
Retained earnings |
|
580,000 |
|
Total liabilities and stockholders’ equity |
$ |
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.
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 $50,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules: Use the formats/tables below. Any other format is unacceptable. Below each table, show how you arrived at the numbers in your tables. Lack of detailed calculations will reduce your marks even if the answers are correct.
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.
|
