You have just started as an apprentice at Nia Artist Studio, 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 Because 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-$16 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): 23,400 June (budget) 29.400 July (budget) 43,400 August (budget) 68,400 September (budget) 53.400 33,400 31,400 28.400 103,400 January (actual) February (actual) March (actual) April (budget) May (budget) 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 $5.70 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. Only 20% of a month's sales are collected in the month of sale. An additional 70% are collected in the following month, and the remaining 10% are collected in the second month following sale. Bad debts have been negligible. Monthly operating expenses for the company are given below: Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation Insurance is paid on an annual basis, in November of each year. The company plans to purchase $24,500 in new equipment during May and $57,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,750 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 4% of sales Prepaid insurance Property and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable $ 370,000 $ 35,000 Common stock Retained earnings Total liabilities and stockholders' equity $ 140,000 $ 15,500 Accounts receivable ($47,040 February sales; $555,520 March sales) Inventory $4,700 $ 31,000 $ 91,000 602,560 155,952 29,500 1,120,000 $ 1,999,012 $ 117,000 27,750 1,140,000 714,262 $ 1,999,012 The company maintains a minimum cash balance of $67,000. 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 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 $67,000 in cash.

You have just started as an apprentice at Nia Artist Studio, 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 Because 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-$16 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): 23,400 June (budget) 29.400 July (budget) 43,400 August (budget) 68,400 September (budget) 53.400 33,400 31,400 28.400 103,400 January (actual) February (actual) March (actual) April (budget) May (budget) 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 $5.70 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. Only 20% of a month's sales are collected in the month of sale. An additional 70% are collected in the following month, and the remaining 10% are collected in the second month following sale. Bad debts have been negligible. Monthly operating expenses for the company are given below: Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation Insurance is paid on an annual basis, in November of each year. The company plans to purchase $24,500 in new equipment during May and $57,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $27,750 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 4% of sales Prepaid insurance Property and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable $ 370,000 $ 35,000 Common stock Retained earnings Total liabilities and stockholders' equity $ 140,000 $ 15,500 Accounts receivable ($47,040 February sales; $555,520 March sales) Inventory $4,700 $ 31,000 $ 91,000 602,560 155,952 29,500 1,120,000 $ 1,999,012 $ 117,000 27,750 1,140,000 714,262 $ 1,999,012 The company maintains a minimum cash balance of $67,000. 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 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 $67,000 in cash.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter8: Budgeting For Planning And Control

Section: Chapter Questions

Problem 43P: Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of...

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